Economists Are Starting to Get a Clue

Infofore0806_introLook who’s caught up to reality: The economists who participate in the WSJ’s Monthly Economic Forecasting Survey:

"This month’s economic forecasting survey showed projections for gross domestic product and employment growth were cut, while forecasts for consumer prices and oil prices were lifted. Economists continued to nudge higher their estimates of the probability of a recession over the next 12 months; on average, they put the likelihood at 26%, up from 20% in June and just 15% in February.

Economists, on average, forecast GDP growth at a 2.8% annual rate for the third quarter, the first time their forecast for that quarter has been under 3% since the economic forecasting survey first asked about the period in November 2005. While their forecast is slightly above the 2.5% real GDP growth recorded in the second quarter, it is well below the 5.6% growth in the first quarter and average annual growth rate of 3.2% from 2003 to 2005. The economists forecast growth slowing to a 2.6% rate in the fourth quarter, and staying at that rate for the first half of 2007. GDP is the broadest measure of economic output."

Their consensus on growth is still too high, and their read of inflation too low. But at least they are starting to get clued in.

And what do they believe are the key risks? The WSJ notes:

Risk to GDP: Higher-then-expected energy prices were highlighted as the biggest risk to growth.

Crude: Price forecasts were lifted for the fourth time, but easing was seen from current levels.

Housing: Price growth was seen at its lowest in years; some economists see declines in 2007.

Jobs: Economists saw the unemployment rate rising in 2007 and cut forecasts for payroll growth.

See also today’s Econoblog for a good debate on how Oil prices may or may not precipitate a recession:  Will Oil History Repeat Itself?.


Economists Paint Gloomier Picture
Outlooks for GDP and Employment Are Cut,
While Concerns About Recession Edge Up

WSJ, August 10, 2006 9:45 p.m.; Page A4

Will Oil History Repeat Itself?
James Hamilton, Stephen P. A. Brown
WSJ, August 10, 2006 5:13 p.m.

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  1. Jack commented on Aug 11

    Just goes to show, economic consensus is generally a lagging indicator. Reminds me of what I heard someone say once: “Economics is extremely useful as a form of employment for economists.” Of course there are those few economists that do have insight into reality, (like Barry!).

  2. Robert Coté commented on Aug 11

    The problem with driving by looking through the rearview mirror is that as you go over the cliff all you see is blue skies looking nothing but up. I am staring in disbelief at the morning talking heads. Astounding that “better than expected” retail sales. Just ignore the negative savings rate and ignore the 20% of the economy in the housing sector. Lies, damn lies and statistics.

  3. Anderl commented on Aug 11

    Economists are a laggin indicator. By the time they claim a slowing economy the economy is recovering.

  4. Anderl commented on Aug 11

    Robert Coté, you contradict yourself. Saying first the probelm with drinving by lookin gin the reear view mirror and then go on about reail figures, savings rate and the housing sector which have been in the rearview mirror for months. Better turn your head back around and see where you are going.

  5. rockprotect commented on Aug 11


    I believe Cote is using the relationship (provided in great detail by our host) of what’s in the rearview mirror (i.e., bad housing, savings rate) to imagine what’s ahead, whereas most folks on TV have not been talking about such relationships.

    – rock, protect

  6. rockprotect commented on Aug 11


    I believe Cote is relying on the relationship (described in great detail by our host) between what’s in the rearview mirror (i.e., bad housing, debt, savings rate) to imagine what’s ahead, whereas most folks on TV generally have not talked about such relationships.

    – rock, protect

  7. JDamon commented on Aug 11

    OK, now I’m really confused. Market goes down after Fed stops raising rates on fears of a SLOWING economy. Then, 3 days later market goes down on fear of a too “RAPID” growth in the economy (retail sales strength). Does anyone else see the media/talking heads spin ANY news no matter which direction as bad for the market?

    Let’s forget Corp. profits are at all-time highs, P/E’s are much lower than anytime in the last 10 years and corporations are buying back shares, increasing dividends and beginning to spend more money on Capex. These are all BAD things somehow?

    Guys, take off the “death, doom and despair” glasses and take a pulse of what is really happening.

    Yes oil is high, but I don’t see a bunch of folks in the bread lines. Yes housing has come down or is not growing at the same record pace it was. People still have equity to tap if the need it. People will also start looking at the market for savings vs poring into housing which is GOOD for the market.

    If the economy comes in for a soft landing, this market is extremely undervalued. I believe the market has already priced in a recession due to all the sectors who have seen 20+% declines this year. Name a sector that has been spared and I’ll name 4 that haven’t.

  8. Chief Tomahawk commented on Aug 11

    Way to go Doug Kass! He was on CNBC’s “Squawk on the Street” last hour and resisted the permabull indoctrination attempts made by anchors Mark Haynes and Erin Burnett. Doug’s shorting PMIs and housing-related businesses like Bed, Bath, and Beyond, as he’s VERY negative on housing.

  9. Robert Cote commented on Aug 11

    Kass took over the microphone. It was great. Erin Burnett asked why the Fed pause wouldn’t saving the housing sector and he explained exatly why. Mark Haynes was -momentarially- speechless. Kass had managed to get in about 10 points in 15 seconds. Short the HBs of course but the PMI providers and ripple industries mentioning BB&B as one. The money quote: “Just because housing hasn’t gone down in the last 50 years doesn’t mean it can’t.”

  10. Craig commented on Aug 11

    Folks, it doesn’t matter what the media or press says, unless they really hammer on the negative. I sure haven’t seen that with all the perma bulls on TV. We are beginning to see more bears and the commentary is just *starting* to go negative. More since the fed “paused”.

    They (the media) are as blind as any sheep in the middle of the flock and their commentary ISN’T the market and they don’t move the market trends. They are trapped in the middle of the flock and rarely do they get a view of the overall direction of the flock.

    You could argue that Cramer (or your choice) can boost a stock by a few pts in the aftermarket one day and perhaps the next morning, but that would be comparing waves to tides. We are talking about TIDES here, not little waves from the likes of Cramer or Mark Haines and Aron Burnett.

    There may be a few incoming waves to fool you into the water, but the tide is going OUT.

    For those still confused:
    Fed may need to raise rates again….negative.
    Economy slowing, profits slowing, fed steps aside….negative.
    IOW, sitting on the fence, either side you jump to is negatory.

    Negative news has now been correctly interpreted as negative, ending the previous environment and confusion. The counter-intuitive fed reads are now history. That was working only as long as the economy actually didn’t slow during the fed raising.

    That has now changed. NOW we see the fed ending as a confirmation of the slowing trend. IOW, all the middle sheep WAITED for the fed to tell them where they are. That is to be expected. Most people are followers, not leaders, so they wait to be told what is happening.

    Just a month ago it was a sign the economy was steaming and needed to slow. Once that started to actually happen everyone suddenly saw where that trend is going. Slowing economy. Since the market is a discounting mechanism, guess what they means?

    To expect more of any other humans on the average, including analysts and media types, is a mistake. All the people on TV with few exceptions will be sheep in the middle of the flock. There is only so much room on the edge of the flock where sheep can see where they are going.

    BTW, I know this as I train herding dogs for fun and profit, live on a farm and own livestock including sheep.
    There are many similarities! Being good at “reading” livestock is actually fairly useful in this economic endeavor. Mobs of people and flocks of sheep are very similar.

  11. Robert Cote commented on Aug 11

    Kass also reffered to current housing prices as a “three and one-half sigma event.” He was talking prices to incomes. Brutal.

  12. kc commented on Aug 11

    “P/E’s are much lower than anytime in the last 10 years”, which is relative.

    It was the wealth effect due to housing, a bull market, and cheap loans that drove E up – however when the E comes back down during the next year the only way to have the same P/E is for P’s to fall..

  13. Anderl commented on Aug 11

    rockprotect, So Cote looks into the past to gauge the future. And how is that not what economists are doing every day on TV.

    I give you this in Cote’s words. “The problem with driving by looking through the rearview mirror is that as you drive up out of a gorge all you see is all the wreckage of everyone that fell in.”

    Housing is down. it has been down for some time. Savings has been down it has been down for some time. Don’t looking at past trends for the current trend. Look at the momentum of that trend to see if there is any kind of change in the trend.

    Trading and economics is like driving a car with the front window painted black. You can use the rear view mirror but that won’t tell you what is coming only where you have been. But if you look on the side window at compare it to where you were a moment ago at least you can tell if you are still on the road or not.

    My problem with posting all these statistics are that everyone gets stuck parroting the same thing over and over again without knowing the reason for why it is happening. They take the easiest answer and run with it and keep running with it well after a trend change. Drive off the road looking through the rear view mirror and keep going off the road expecting it to wind back around to meet your path. Where is the logic in that?

    The question is a lot of people have been preaching all year that the road in turning into bear country which I perfectly understand and was in agreement with. But are in the later half of the year and now moving into the last quarter, you have to ask yourself if you are still on the road or has it turned out from under your path?

  14. Chief Tomahawk commented on Aug 11

    Robert Cote, nice to read someone else saw the same thing. It was way too short a segment ~ 3 minutes? And yes, statistically speaking home prices have a long ways to fall to the traditional multiple of household income. That is unless more exotic loan products are used to cushion the descent.

    But I would suggest shorting retailers like CC and BBY too. When the consumer gets pinched I see sales of big screen flat panel plasmas plummeting as households will prioritize other necessities. And the margins on the new, non-CRT tvs have juiced earnings of Best Buy and Circuit City the last few years.

  15. Sheepish commented on Aug 11

    Craig, I want to be the herding dog or the shepard, not the sheep. My dad grew up on a ranch and told me sheep are one of the dumbest animals he has ever had to disentangle repeatedly from barbed wire.
    Rather be a wily herder than part of the herd.

  16. Cherry commented on Aug 11

    At this point, Oil is a WAY overrated issue. It isn’t that big of deal. Oil was way below inflation in the late 90’s and has been slowly catching up since. Once the recession begins next year, Oil SHOULD come down, if it doesn’t, than some major inflating is going on…..

    The key is whether the housing lead recession will lead to the collapse of the ponzi credit bubble that has been going on since 1996. We are more sensative now than in 2000 due to the massive debt we have compiled, it could force the hulk to crash.

    That is 1-3 years down the line however. Now a mild recession only looks likely.

  17. Craig H commented on Aug 11

    So what if P/E’s are as low as they’ve been any time in the past 10 years? The dollars those earnings are reported in are worth less than ever, as are the dollars used to buy stock, and the dividends paid in dollars. Seems to me that earnings should be worth less in dollar terms, especially if you’re a foreign investor who has to convert dollars back into a foreign currency after you sell your stock and the greenback has weakened during your holding period.

    I think one of the reasons the reporters on Bubblevision are always looking for the bull case is because their GE stock has been trending down the past 2 years and is now looking into the abyss it plumbed in 2003. Hope springs eternal in the heart of the bagholder.

  18. JDamon commented on Aug 11

    Craig H.,

    Hypothetically, if you had $1m in equites right now (10% cash), what would you do with it and if you go say all cash, what rate would you look to get? Also, how long would you stay out of the market?

    Just curious as to other options than an all long portfolio the big wirehouse firms have people in (to earn their 1.5% management fee of course).


  19. Craig H commented on Aug 11


    Conservative: 33% 3-month bills (short maturities because rates will rise further), 33% puts on cyclicals, 33% tax-free money market fund (portfolio owner will be in 35% tax-bracket thanks to puts), 1% (or less) longs.

    Aggressive: 10% 3-month bills, 49% puts/shorts on cyclicals, 40% tax-free money market fund, 1% longs and prepared to commit to more shorts/puts from the money fund when the market breaks support.

    I subscribe to Jesse Livermore’s motto that there’s a time to be long, a time to be short and a time to go fishing. This is a time to either be short or be fishing.

  20. wcw commented on Aug 11

    I think fishing, myself, though I have both some longs and some shorts. Net-net, I’m still long, but I have a pretty heavy cash-and-similar position.

    In re: inflation, the market doesn’t believe in it either yet. Check out the spread between CPI and the difference between 10-year nominal and TIPS. The last couple years, thanks to CPI TIPS easily have been throwing off 100+ bps over the 10-year bond. Either real rates are too high, nominal rates are too low or CPI inflation is transitory, but you can’t make excess returns on a lower-risk position forever. Something’s got to give.

  21. ss commented on Aug 11

    Dougie Kass has called 50 of the last 5 corrections.
    He is a smart guy though.

    Today was definately a fishing/goilfing day…got mine in. The volume was pathetic.

    The weekend papers will be throwing a lot of what we’ve been dicussing here around, and I believe the adults will show up with buy tickets next week. I just hope we don’t get another (sucker) gap up on Monday AM.

  22. Craig H commented on Aug 11

    I want to illustrate how a weak US Dollar discourages foreign investment in the US stock market, contributes to a lack of demand for US stocks and forces the S&P’s P/E ratio down to compete with other world markets to attract investors.

    It’s the 3rd quarter of 2002 and you’re a Frenchman who decides to invest in the S&P500 by buying SPY. At the time, the exchange rate of the Euro to the Dollar is 1:1.

    So you take 10,000 Euros and convert them into 10,000 Dollars and you buy 111 SPY @ $90.

    Today you decide to sell those SPY and convert your money back into the Euro.

    The good news is that SPY is up about 38% and your 111 shares are now worth $14,097.

    The bad news is that your 14,097 Dollars are only worth 11,075 Euros, thus you’ve only made 10.75% on your original 10,000 Euro stake.

    Had you kept your money in Europe and invested in the CAC-40, you would have been up 60% over the same period, and you’d have 16,000 Euros.

    Until the Dollar reverses its slide, foreign demand for US stocks is going to be weak and we’re less likely to see a repeat of 1995 (when foreign capital flooded in) even if the bulls’ soft-landing Goldilocks scenario comes true.

  23. Mike_in_Fl commented on Aug 11

    One thing I mentioned in another thread that kind of got buried: Have you seen the carnage lately in the high-risk mortgage lending stocks? I’m talking about CFC, LEND, etc., etc. The past few years have seen a virtual orgy of easy mortgage lending, fueled by the Fed’s “Free money for everyone” policies. But now, delinquency rates and loan losses are mounting fast, and credit is finally starting to tighten.

    I have a post or two about this on my blog if you’re interested:

    But suffice it to say, even IF the Fed pauses and risk-free (i.e. Treasury) rates stabilize, who’s to say that credit availability will improve? Who’s to say that will support housing? If lenders start tightening up mortgage requirements (a few subprimers have started doing so already in response to a tighter secondary market) due to surging loan losses/delinquencies, that could curtail mortgage credit availability. Put another way: Credit could get tighter even IF risk-free rates decline or stabilize.

    We all have to stop believing the Fed can control the economy perfectly. The Fed’s 2001-2002 rate cuts didn’t do squat for months on end because investors shunned risk. Isn’t it possible lenders/banks/ABS/MBS investors will do the same thing this time as losses mount on condo construction loans, 100% LTV mortgages, etc., etc.?

  24. ss commented on Aug 11


    Currencies fluctuate all the time….we can all play around with “what ifs” like that.

    The dollar is in a TRADING RANGE from ~ 82 – 92, and will prolly settle in the middle, imho.

    In fact, if you eliminate the ’90’s “aberration data” (The Era of Lies), the dollar has merely come back to it’s correct range. This WILL help US exporters, and further deplete the trade deficit (BTW, no comments from the Bears on the Budget Deficit #’s dropping ~ 20% (yoy) this week?)

    I like Rev Sharks comment today:

    The good news is that the number of bulls who are feeling hopeless and the number of bears who are saying “making money on the short side is easy” continue to grow. They eventually will be the fuel for a lasting turn..”

  25. Craig H commented on Aug 11

    “Currencies fluctuate all the time….we can all play around with “what ifs” like that.”


    It’s not a “what if”, it really happened. You’re free to prognosticate all you want on the direction of the dollar as are the Europeans. The Italian central bank recently sold dollars and bought British pounds, and they weren’t playing around. That’s a real vote of no-confidence in the greenback. If oil exporters like Iran and Russia start demanding payment in Euros, instead of just threatening it, look out below.

    You see a trading range where I see a downtrend from 2002 that reflects the easy money policies of the U.S. government. Long, intermediate and short, the trend remains down.

    As to your devotion to anecdotal sentiment indicators and your acceptance of the falsehood that bears are saying it’s easy to make money on the short side (it’s never easy to make money, period): I find it quaint.

    When it comes to a sentiment indicator, all I trust is the VIX. It takes money to make that move and it tells me that longs remain complacent – like steer at the slaughterhouse.

    The budget deficit is down? Well whoopti-doo. It’s still a deficit, right? And we’re still the biggest debtor nation on earth, right? I suppose we should all be glad we’re going bankrupt with slightly less haste.

  26. RW commented on Aug 11

    Good post Craig, and quite accurate. My own sense however is that $USD will still garner support from central banks mainly because international trade depends so much upon it: sooner or later I believe there will be a new “Bretton Woods” to resolve the problem but I think right now everyone is scared to death over what a real $USD collapse might involve so our currency (and long bonds) will continue to receive international support, at less ‘enthusiastic’ levels perhaps, and will continue to frustrate the greater expectations of bond and dollar bears alike as a result.

    But there is no reason to concede the point WRT budget deficits in any case: they are growing as fast as ever. The only reason they appear to be ‘improving’ is because this administration excludes the Iraq costs and consistently overestimates how large they will otherwise be then beats that number; sound familiar? Yep, the same game that some corporations play to hit their numbers; the sell-side is so delightfully devoid of scruple.

    For example this past February the administration projected a $423 billion deficit for 2006, so the latest figure is (surprise, surprise) a huge drop. A skeptic might say that the first estimate was merely inept; a cynic might argue that it was deliberately exaggerated to magnify any subsequent improvement. Naturally the administration argues that the ‘shrinking’ deficit (based on its own previous projections) ‘proves’ their economic program is working.

    Rather sad. Sadder yet that so many people seem to believe it but since there are still those who actually think the tax cuts are paying for themselves perhaps it’s not all that surprising.

  27. rockprotect commented on Aug 12


    I understand your general point. You ask some valid questions. (I don’t know the answers, of course, or else I would not be long/short — I would be one or the other!) I could defend Cote’s post more but I don’t think it’s worth it, because we’re probably just emphasizing different sides of the same coin.

    -rock, protect

  28. ss commented on Aug 13


    Yes, the economic recovery (helped by tax cuts) is REALLY A CONSPIRACY….we’re actually at 15% unemployment, and everyone has sold all their dollars..and bought gold.


    Move on.dork

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