The Expectations Gap: An Alternative Measure of Economic Slack

The output gap hinges on estimates of potential GDP that can vary widely and are ultimately unobservable. To circumvent these issues, historical surveys of professional forecasters’ nominal GDP projections can be used to construct an “expectations gap,” which shifts the benchmark for economic performance to what GDP was expected to be. We (1) extend the expectations gap to a higher-frequency survey and assess its sensitivity to alternative forecast horizons; (2) capture its range using forecaster disagreement; (3) compare nominal and real measures of the expectations gap against conventional output gap measures; and (4) produce real-time forward-looking estimates and assess their performance near business-cycle turning points. Although the expectations gap is highly correlated with existing output gap measures, unlike other measures it detects overheating during the housing boom and bust cycle of the mid-2000s and increasing slack during the “invisible recession” of 2015–2016.