Economists: 49% Chance of Recession
One of the themes we seem to be hitting a lot at TBP is compromised actors in the market/economic system. We had the Analysts in the iBanking scandal after the dot com bubble unwound, then ratings agencies in the sub-prime debacle.
The latest group to be looked at askance: Economists.
Suggestions of inherent structural bias was put forth by several BP readers who work at bulge bracket firms. They have made the following (somewhat persuasive) argument: iBanks, Brokers and Money Center Banks live on some revenue combination of asset based and transactional fees. They make more revenue in bull markets than bear markets. Further, most of their clients are similarly compensated. Hence, their research and commentary tends to look on the (Monty Pyrthonish) bright side of life.
Perhaps. My view is the discipline is not particularly good at what it is supposed to do, it is too narrow, manages somehow to ignore human nature, has become way over-politicized, and last, conceptualizes the world in an absurd way.
But inherently biased works too. And that leads us directly to today's discussion: According to a recent WSJ survey, Wall Street economists almost put the odds of a recession at almost 50/50. Better than even chance of no recession:
"On average, the survey's 52 respondents put the odds of a recession at 49%, up from 40% in the January survey and 23% in June. Moreover, if a recession does materialize, they gave 39% odds that it will be worse than the past two recessions . . .
On average, the economists, who were surveyed between Jan. 31 and Feb. 4, predicted the nation's gross domestic product -- or total output of goods and services -- will expand at a 0.6% annual rate in the first three months of this year; that is down from the 1.2% pace predicted in the previous survey. In fact, they lowered their growth estimates for every quarter of 2008. The economy grew a slim 0.6% in the fourth quarter of 2007, a sharp deceleration from the third quarter's 4.9%.
If there is a downturn, the economists said, there is a better than 1-in-3 chance it will be worse than the one in 2001 or the one that ended in early 1991."
The most fascinating tidbit about Wall Street economists: As a group, they have never forecast a recession in advance. Never. Some get it right, but overall, the group has been consistently late in recognizing contractions.
Not so Dismal Science after all . . .
>
Click for interactive WSJ (free)
Source:
Economists Raise the Odds of a Recession to 49%
Bernanke's Ratings Slip, Despite Effort To Reignite Growth
PHIL IZZO
WSJ, February 6, 2008; Page A4
http://online.wsj.com/article/SB120224203841244993.html
Thursday, February 07, 2008 | 06:54 AM | Permalink
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Barry,
I have, for some time, been fascinated (or maybe perplexed is the right word) by Wall Street's asymmetrically bullish slant. While I believe that some are just naively optimistic all the time, causing them to simply ignore reality, I agree with you that much of this blind optimism stems from a wonderful conflict of interest.
My criticism isn't just leveled at economists; the entire structure is compromised. Whatever their reasons, it seems that Wall Street loves fighting the tide of a bear market. Yes, it's better for business when the market rallies, as everyone wants to jump onboard, but peddling long strategies to clients in the face of what could be a significant bear market isn't exactly my idea of service. Call me a cynic.
Posted by: Peter Davis | Feb 7, 2008 7:39:14 AM
Recessions are bad news and it is human nature for people to not want to hear bad news, even if hearing it in advance could actually lessen the impact of the bad news. And, in general, people would rather pay someone to tell them what they want to hear, rather than something they'd rather not hear. So there's basically a lot of inherent bias in the system due to the many positive incentives for being bullish.
Posted by: Doug Watts | Feb 7, 2008 7:49:57 AM
Larry Kudlow was Bear Stearns' economist. That should say all that needs to be said about IB economists.
Posted by: DC | Feb 7, 2008 7:52:59 AM
As an analogy, meteorologists can explain how the weather works but even as our knowledge of weather increases exponentially, the atmospheric system itself is far too complex and has too many multiple variables and feedback loops to allow a great deal of accuracy in weather predictions of more than 2-3 days in advance.
Posted by: Doug Watts | Feb 7, 2008 7:54:13 AM
If economics was a precise and exact science, then all graduates of masters or more advanced programs ... those who are skilled in econometrics ... would be rich as kings. Since being quoted in the WSJ is known as a career enhancer, this implies that none are wealthy and, thus, all are grossly infallible.
This might or might not be a nasty dip. But where are the massive layoffs, such as those of the prior downturns? Retail is starting to announce a few and financial companies don't count. Many companies are announcing profits, and a few are saying that less profit might be coming next quarter. Please note that less profit is not a loss. It is still hard to find and hire good people.
Lower interest rates will have to work their way through the economy. In about a year, the next challenge will be to repair the US government's books in order to prevent something really nasty a few years from now.
Most economists are about as useful as financial house pundits or political opportunists. Look at Shiller, who is using his statistical analysis of housing to promote a leftist point of view. Or Krugman and his socialist agenda.
Rather that say "THE RECESSION IS COMING!!!", what specifically can we expect to see over the next few months and into next year? A fraction of a percent dip in a sterile statistic isn't very scary. What comes next? A recovery or a further and continual descent? How will "A RECESSION" actually affect people and when can we expect to see it, not including the California tulip speculators.
Give me a cause and effect chain for the next few months and a potential scenario for after that. Explain how it would affect Joe and Jane Average In Indiana or Iowa, and not a screaming finance baby ... the kind who have great access now to the media.
~~~
BR: I have to nominate this for your best post to date . . .
Posted by: cinefoz | Feb 7, 2008 8:06:50 AM
I think most of this noise heard is just pyschological mumbo jumbo. I am sure the powers that be look at studies of pyschological behavior of the masses and to a point, contol behavior.
I am in medicine. So an analogy for me is a patient that is dying. All the signs are there. Everybody just holds out hoping for a miracle. It's human nature. An example is that Siovo(Spelling?) woman in Florida. All scientific tests showed rhis woman to be gone, brain dead, yet he opened her eyes, tracked people in the room, etc. I have seen it many times in brain injuries. Still many held out hope that it would be okay. Doctors don't want to squash that hope becaue you never know? You may experience a miracle?
Posted by: ken h | Feb 7, 2008 8:17:46 AM
Or, as ken h believes, is the economy dying, never to recover.
Tell me, ken, what does a dead economy look like? Can a Dr Frankenstein reanimate it, or will we all be the embodiment of a zombified corpse for as long as our miserable lives last? Is today bad and tomorrow going to be even worse, forever? Will the mission of the US economy be to chase down those who remain among the living and eat their brains?
Being in medicine, please describe some of the clinical attributes of Depression. Then compare and contrast those with what you just wrote.
Posted by: cinefoz | Feb 7, 2008 8:29:19 AM
Would any economist call a recession until they see two quarters of negative GDP growth? What I-bank economist's EVP or CEO has the cojones to signoff on making that call before even one quarter of negative GDP per the BEA? That press release has to go through channels before it sees daylight. They were predicting a 50-50 chance several weeks ago. I guess not much has changed.
Posted by: bonghiteric | Feb 7, 2008 8:31:57 AM
Well, with Martin Feldstein running NBER (The folks who "call" the recession...) you can be sure this highly partisan Nixon/Reagan/Bush genuflector will do everything in his power to 'save' the historical reference of how wonderful the "Bush tax cuts" were.
I mean look at how they've re-written the history on Reagan. Reagan raises Social Security taxes, unleashed the S&L's to nearly bankrupt the economy, set us up for decades of terror with his cowardly retreat from Lebanon, lied about Iran Contra, and even flip-flopped on abortion to win the White House. The list goes one and on. They need fodder to rewrite history.
You watch, in twenty years the political ads for the GOP will show the candidates shaking hands with W. our national savior.
Posted by: VennData | Feb 7, 2008 8:32:40 AM
You ask and you shall receive Cinefoz. As usual, we give you facts, and you give us...nothing.
here is Iowa: http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20080124/BUSINESS/801240377/1029/archive
Indiana has been in a recession for some time and now it's going to get worse with housing constuction jobs and related industries coming to an abrubt halt.
http://www.tribstar.com/business/local_story_029233127.html
Why don't you provide the industry that replaces housing and ALL the related fields to boost GDP. Last I knew, you had to have a job to buy a house.
Posted by: ken h | Feb 7, 2008 8:35:57 AM
"My view is the discipline is not particularly good at what it is supposed to do, it is too narrow, manages somehow to ignore human nature, has become way over-politicized, and last, conceptualizes the world in an absurd way."
"The most fascinating tidbit about Wall Street economists: As a group, they have never forecast a recession in advance. Never. Some get it right, but overall, the group has been consistently late in recognizing contractions."
Two sides of the same coin. Given the former, why would we ever expect the latter?
Posted by: Tom | Feb 7, 2008 8:51:42 AM
economists, politicians, bankers,retailers, auto industry and homebuilding execs, etc, etc, etc. I think we have to face the fact that success measured by position simply does not equate with intelligence.
Posted by: rw | Feb 7, 2008 9:04:07 AM
Bank/Wall St economist face the same pressure analysts and managers do. If you make the same mistake everyone else does you probably will keep your job. If you go out on a limb and are wrong you are quite likely to lose your job (client base).
They tend to forecast something very close to what the major econometric models are producing and it is almost impossible to get the major econometric model to generate a recession scenario because of the way they are constructed and the assumptions built into the models.
Recession happen when business makes a mistake and has unintended inventory accumulation or as in 2001 excess capital spending. So to forecast a recession you have to forecast that business will make a major error. Econometric models do not do that because they are constructed to have market always clearing.
Posted by: spencer | Feb 7, 2008 9:04:23 AM
49%? Can we have a margin of error with that?
Why not 49.999999999%
That looks like a "Hold" rating from the sell-side anal-ysts
Posted by: Francois | Feb 7, 2008 9:10:06 AM
cinefoz....you get better and better each day.
You want layoff numbers, but "financial companies don't count"? LOL. This mess was created by financial companies, yet we should discount their layoffs?
Where do you live? It obviously isn't close to Michigan or Ohio, that have been "in a dip" for a bit now, due to the auto sector sucking wind. Or should we discount that as well?
Posted by: Mr. Obvious | Feb 7, 2008 9:18:53 AM
WSJ: Some 68% said the credit crisis and related market turmoil was about half over, but the majority (60%) has been saying that since the question was first asked in September.
heehee. Sooner or later, they're going to be right!
Wall Street economists seem to be trying to increase the sales of Nassim Nicholas Taleb's books.
Posted by: Bob_in_MA | Feb 7, 2008 9:20:34 AM
With the debt crises we're having, a few "analysts" are mentioning a coming disaster in municipal bonds calling them the new "junk" bonds.
Does anyone have any input on this?
Posted by: Steve C | Feb 7, 2008 9:23:06 AM
From WalMart:
Gift card redemptions were below expectations, and customers appear to be holding gift cards longer and using them more often for food and consumables rather than discretionary purchases.
Yeah...nothing to see here...move along....
Posted by: Mr. Obvious | Feb 7, 2008 9:29:50 AM
I love this site and the way it cuts through the marketing and spin. The spin that comes out of the Street is no different from the spin that comes from politicians. Companies that make money from transactions or assets under management spinning to help their revenues and profits? And bonuses? Do we need to even need to debate that?
I work in the real world where people work hard for small hourly wages or commission-only income. I see the consumer credit issues really starting to accelerate. I see people walking in for low $ jobs that are overqualified (most come from real estate but they come from other industries as well). I see food/beverage companies intent on managing to their profit targets by continuing to pass on huge cost increases on inputs. And I see homeowners' hoping blindly for a quick rebound.
I am no economist. I hear talk of deflation and I have no dout that home prices and maybe energy can come down. But if the consumer is tapped out and it is their piggy bank (home) that is deflating while food prices rise, is that really deflation? And in a world where hitting Wall Street targets equals huge bonuses for executives, do we really think that a slowing economy will result in price drops? Or price increases to meet the bottom line target on lower revenue?
My guess is that food prices will continue to go up until something really hits the wall, consumer purchasing power will continue to diminish, and we have not even begun to see the drop in home prices and maybe equity prices. How do we see the consumer recovery happening? Not through W's handouts. . .
Posted by: H Bear | Feb 7, 2008 9:33:14 AM
The basic problem is that they work for Wall St. Therefore it can be filed under the proverb "Never ask a barber if you need a haircut"
Posted by: Jim Jansson | Feb 7, 2008 9:36:25 AM
Wal-Mart used the weather as an excuse too...
"it's not OUR fault it's god's fault"
Ciao
MS
Posted by: michael schumacher | Feb 7, 2008 9:36:53 AM
biased economists, now that's a good one. What's next, prejudiced scientist? "Why let a good thesis get in the way of the facts." Smartest, or most honest thing that Jim Cramer said this morning on CNBC. And is perhaps his MO.
Posted by: Justin | Feb 7, 2008 9:45:55 AM
Economists and pundits have a role in managing asset value destruction. It's as simple as that. Every advisor of one sort or another has an interest in selling us sunshine when the reality is much darker.
On Black Tuesday, my speculative inventor relative was sitting in cash (She had actually analyzed the market from her armchair and predicted there was going to be a problem). All day, her large brokerage house broker was calling her as the market kept dropping. "Buy! buy! buy!" Was that in her interest, or in the interest of stopping the wholesale destruction of financial asset value that is a market crash?
Obviously, I strongly suspect that the brokerage house had directed all its reps to tell the customers to buy for the sake of the market, not the investors.
Hey I hear there's great opportunities in the real estate sector right now...
Posted by: Burnt burrito | Feb 7, 2008 9:56:34 AM
About 20 years ago when "expert systems" were in vogue someone asked a big proponent of such systems whether it would be a good idea to write such a system for economics. His response was swift and to the point. He said "No, we can't write such a system when the experts in that field can never agree".
Posted by: Carmen | Feb 7, 2008 10:10:29 AM
Cinefoz, here's a very well articulated cause and effect argument:
www.financialsense.com/Market/wrapup.htm
Posted by: Justin | Feb 7, 2008 10:20:36 AM
