Predictions of growth in U.S. corporate profits: Asymmetric vs. symmetric loss Hamid Baghestani ⁎, Ashraf Khallaf 1 School of Business and Management, American University of Sharjah, P.O. Box 26666, Sharjah, UAE article info abstract Article history: Received 17 October 2010 Received in revised form 20 March 2011 Accepted 20 September 2011 Available online 28 September 2011 This study evaluates the Federal Reserve and private forecasts of growth in corporate profits for 1984–2004. These forecasts are both rational and directionally accurate but suggest differ- ent loss structures. The Federal Reserve forecasts tend to significantly under-predict and imply asymmetric loss. The private forecasts, however, are free of such bias, suggesting symmetric loss. Given that the Federal Reserve forecasts are made to help with policymaking, our findings point to the Fed's cautiousness not to incorrectly predict the downward moves in growth in corporate profits. The private forecasts are made by experts who (with a strong profit- motivated interest) attempt to generate financial gain and thus predict the upward moves as accurately as the downward moves. © 2011 Elsevier Inc. All rights reserved. JEL classifications: G17 G30 E52 Keywords: FOMC Survey of Professional Forecasters Unbiasedness Directional forecast accuracy Loss structure 1. Introduction Corporate profits provide a valuable signal of the current and future prospects of corporate financial health and are essential for the process of capital allocation within an economy. The role of profits for the corporations and economy as a whole is of in- terest to different groups including investors, industry analysts, macroeconomists, and policymakers (Desai, 2005; Fama & French, 2000; Kothari, Shu, & Wysocki, 2009). In particular, corporate profits serve as an important indicator of economic growth; a rise in corporate profitability would suggest that the economy is on a secular growth path, while a fall in profitability would sig- nal slow growth and a likely recession. Despite the inherent difficulty, both the public and private sectors are constantly engaged in forecasting this indicator. For instance, the Federal Reserve forecasts growth in corporate profits to help with policymaking, while the private sector does so for the purpose of generating financial gain. In this study, we ask whether the Federal Reserve and private forecasts are unbiased, superior to the naïve forecasts, directionally accurate, and whether they are rational under asymmetric or symmetric loss. The Federal Reserve (Greenbook) forecasts are made by the staff of the Board of Governors in preparation for the Federal Open Market Committee (FOMC) meetings, and the private forecasts are the consensus (median) data from the Survey of Professional Forecasters (SPF). Our findings for 1984–2004 indicate that the Federal Reserve forecasts tend to significantly under-predict and imply asymmetric loss, while the private forecasts are free of such bias and imply symmetric loss. Consistent with these results, the Federal Reserve forecasts are more (less) accurate in predicting the downward (upward) moves, while the private forecasts International Review of Economics and Finance 22 (2012) 222–229 ⁎ Corresponding author: Tel.: + 971 6 515 2529. E-mail addresses: baghesta@msn.com (H. Baghestani), akhallaf@aus.edu (A. Khallaf). 1 Tel.: +971 6 515 2457. 1059-0560/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.iref.2011.09.002 Contents lists available at SciVerse ScienceDirect International Review of Economics and Finance journal homepage: www.elsevier.com/locate/iref