You have to hand it to economists — they say the darndest things.
In a Wall Street Journal survey, a group of economists “put the odds of the next downturn happening within the next four years at nearly 60 percent.” Oh no.
Today, we will make another entry in the catalog of how worthless predictions tend to be, and more specifically why economists’ long-term forecasts are so uniquely useless.
Let’s start with the math: Saying a recession might occur within the next four years is a statement that contains almost no information. During the 20th century, there were 20 recessions, or one every five years on average. In other words, if you predict a recession within the next four years you will be accurate on average about 80 percent of the time. It’s only slightly more useless than your local weather forecaster predicting that temperatures will fall this winter and rise next summer. This prediction is, of course, absolutely true and of no value whatsoever.
Why do economists have a penchant for extrapolating current data series while ignoring the broader — and more important — context about economic cycles? Perhaps it is because they don’t like admitting that they don’t have any idea when the next recession will come. Almost without exception, economists failed to “anticipate the three most recent recessions of 1990, 2001 and 2007 (even after they had begun).” Don’t expect them to do any better the next time.
Instead, you might want to consider other ways to think about turns in the business cycle. I like the way Economic Cycle Research Institute describes it: Economists tend to use models that “reduce a complex economy to a rigid set of largely backward-looking relationships.” As ECRI notes, extrapolating from the recent past is a sure-fire recipe for being surprised by the next turn. ECRI’s approach is to use the leading economic indicators to provide some insight into when the economy is first slowing its expansion, then tipping into contraction.
Continues at: The Next Recession Is Coming. Big Deal.