Economists: 49% Chance of Recession

Thursday, February 07, 2008 | 06:54 AM

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)Econ_recession_forecast


Economists Raise the Odds of a Recession to 49%
Bernanke's Ratings Slip, Despite Effort To Reignite Growth
WSJ, February 6, 2008; Page A4

Thursday, February 07, 2008 | 06:54 AM | Permalink | Comments (43) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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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

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