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
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.
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.
Larry Kudlow was Bear Stearns’ economist. That should say all that needs to be said about IB economists.
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.
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 . . .
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?
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.
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.
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.
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.
“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?
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.
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.
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
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?
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.
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?
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….
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. . .
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”
Wal-Mart used the weather as an excuse too…
“it’s not OUR fault it’s god’s fault”
Ciao
MS
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.
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…
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”.
Cinefoz, here’s a very well articulated cause and effect argument:
http://www.financialsense.com/Market/wrapup.htm
What I love is that the economists, while only predicting a 49.9% chance of recession, believe that if there is one, it will be more severe than 1991 or 2001.
Thus, if we have a recession (but we only think there’s a fifty-fifty chance of having one) boy it’s gonna be bad? Huh?
Either the fundamentals are sound and any contraction, if there is any, is mild, or the fundamentals suck and you better watch out.
I think Caroline Baum on Bloomberg yesterday had the best one sentence analysis of our economy I’ve seen:
“It is a house of cards built on a mountain of debt.”
I suppose the economists are saying there is only a fifty-fifty chance that the house of cards will collapse, but if it does…
I’d say houses made of cards eventually always collapse. The sooner the better, so we can rebuild w/ something a bit sturdier next time.
From “Whither macroeconomics? The surprising success of naïve GDP forecasts”, by Jon Faust (Professor), Johns Hopkins Unversity
(quote)
We find the surprising result that no model clearly outperforms the univariate autoregressive model. This is one of the simplest possible models: it basically forecasts in every period that the GDP growth will simply follow its historical average rate back to the mean. This may be sobering for not only the Fed but for the macroeconomics profession as a whole: knowledge of interest rates, labour market conditions, capacity utilisation, inflation, or any of about 50 additional variables does not systematically improve our ability to foretell where real activity is headed.
(end quote)
The message of this ? The ego-deflating reality that economists must deal with is that the system will tend to revert to mean or trend. It’s as simple as that!!
This time, even though many measures were at least 3 standard deviations from the mean or trend, public and private economists filled the cars of the “this time it’s different” train. And as a result, public and private sectors are now paying the price.
Unfortunately for the economists, and all of the speculative ink they spilled, the truest prediction will be a return to trend and the collapse of all bubbles in time. It’s not exciting, it’s not ground-breaking, but it’s what happens.
and people call me delusional…
Holy Crap it gets better each post.
Keep it up Cinefoz……I need people like you to sell puts to.
Ciao
MS
As a professional economist I’ve got a few pet peeves regarding my profession and many former colleagues, this is one of them.
You should NOT be allowed to have a 50% forecast. At my last place the lowest base case probability we allowed ourselves to publish was 60%.
If your forecast is 50%, you’re basically saying we have no friggin’ idea what will happen, so we will safely retreat to a “one the one hand, on the other hand” worldview.
That does absolutely zero for the client. Personally I’ve been at 75% chance of recession in 2008 (1990-91 like). 5% chance of depression (1980-82 like) and 20% chance of soft landing (1995-96).
MS,
Yes, I love the God excuse.
In my little town our water works folks are blaming God for their ineptitude at delivering water, even though He gave ’em over 30 inches of rain to work w/ last year.
He’s quite the blame sink for man’s folly, it seems.
It’s just a matter of time until He gets blamed for cinefoz losing all his money going long.
If stocks climb a “wall of worry” in a bull market, then are they now sliding down a “slope of optimism” in this bear?
Cinefoz,
Did not propose the dying analogy to suggest the economy is dying. The post is about calling a recession.
Economists calling a recession remind me of doctors calling death. Economists want to be hopeful despite glaring evidence to the contrary.
You want me to compare and contrast hope? and depression?
Here is hope as I see it? Hope is a belief in a positive outcome related to events and circumstances in one’s life. Hope implies a certain amount of perseverance — i.e., believing that a positive outcome is possible even when there is some evidence to the contrary.
Hopefulness is somewhat different from optimism in that hope is an emotional state, whereas optimism is a conclusion reached through a deliberate thought pattern that leads to a positive attitude. But hope and optimism both can be based in unrealistic belief, or fantasy.
This compares to how you are hopeful that housing turns in the Spring.
Your current hopefulness will be a deep contrast to the depression you will probably be in when it doesn’t. You will note the SIGNS of depression as malaise, a lot of sleeping, and not eating…etc. Lashing out at others,…kind of like you do here?
This is also inconsistent with my feelings of ire. This FUBAR mess interupts and infinges on my life all due to greedy dumb asses and inept politicians.
Good Luck.
If economists were independent and held to their forecasts, the forecasts might improve. They have no skin in the game. Economists have BS’ed everyone into believing their job is so f’ing hard to do accurately. Like Ben Stien, let’s ignore them until they understand this and start placing real money bets on their predictions. A website should post their personal transactions based on their forecasts. See who really stands behind their academic/political mumbo jumbo.
More than 49% in Minnesota
From AP 2/6/08,
(quote)
Minnesota’s chief economist says there’s no longer any doubt that a recession has arrived and a projected state budget deficit will “almost certainly” worsen….
…The memo states that a recession in the U.S. economy is expected for the first half of this year….
….Stinson says this recession will hit Minnesota hard because the state doesn’t have strong defense and energy exploration industries to buffer other economic difficulties.
The poor housing market helped push the economy to the brink and Stinson says Minnesota will feel that pinch because of a substantial wood products industry.
(end quote)
Are there any other brave economists out there?
>> Lower interest rates will have to work their way through the economy.
Cinefoz, do you think long-term rates are headed down or up? Even though the Fed is cutting short-term rates (STR), it’s possible for long-term rates to rise (or just stay the same).
My guess is:
– Most people on this board expect LTR to stay the same or rise.
– You disagree.
This difference in LTR expectations might be at the root of the difference in expectations regarding housing and the economy in general.
I’m trying to find the “root cause” of the disagreement in views…
wunsacon,
Rather than debate favorite statistics, why don’t you describe why things are going from bad to worse to probably even worse yet? And don’t waste my time on California tulip speculators. Nobody is rescuing them. And they are not dragging down the country. Tell me why the economy will never recover, as you seem to believe.
The nice thing is that the economy will respond regardless of what you or I write. Your negativity doesn’t matter. To me, you and many others here are no different than the idiots who bet the market would never stop going up. You people think it will never stop going down. After all, your bubble prediction finally came true.
The collective mantra of the negative types here should be “Today is bad and tomorrow will be even worse. Life is misery and pain. If last month had a problem, next month will have an even worse problem.”
I trust history, because if you are right, the entire world economy will collapse and we will all go back to bartering. In spite of those who deep down expect this to happen any day now, it won’t.
Aren’t economists forecasts for recession generally considered a trailing indicator (by the way, that’s a joke).
I mean the NBER is always after-the-fact – right?
pat
“the group has been consistently late in recognizing contractions.”
(i.e.) The recession that started two quarters ago. I don’t think it’s because they don’t recognize it, I think it’s more of a matter of not wanting to forecast it.
From Greg Mankiw’s Blog
Interpreting the Employment Report
The JEC’s Tim Kane (via email) uses his recession model and interprets today’s employment report:
In this morning’s BLS Employment Situation report for Jan 2008, the unemployment rate is 4.9. Therefore the new employment-based recession probability index (RPI) is 0.060 (or 6.0%).
The RPI is a combination of the two most valuable employment indicators of a recession’s early stages: weekly initial unemployment insurance (UI) claims and the unemployment rate.
The 4-week moving average of initial UI claims was reported yesterday at 325,750, which is 17,000 lower than 4 weeks ago and essentially unchanged from the October average. Alone, trends in UI claims suggest a 4 percent recession probability. The unemployment rate is 0.1 points lower than December, but 0.1 higher than three months ago, suggesting an 8 percent recession probability. Combined, this yields an overall recession probability of 6 percent.
Other economists, I should note, are less sanguine.
http://gregmankiw.blogspot.com/2008/02/interpreting-employment-report.html
“the entire world economy will collapse and we will all go back to bartering.”
This was a common view around 1980 when inflationary depression and nuclear holocaust were in the air. I remember seeing Joe Granville on TV predicting a 200 DJIA. It was the era of “The Late Great Planet Earth”, “How to Prosper During the Coming Bad Years”, “The Fate of the Earth”, etc. etc. etc. Perhaps the predictions were just thirty years early, but really they were contrary indicators.
Are the 49%, one-armed economists ?
Whoa and since economists are only right half the time… oh noes! that means it’s a 100% chance!
Economists predictions are not nearly as meaningful or useful as their thought processes. Their descriptions of models and how they arrived at them are cool, but they rarely amount to anything beyond an intellectual game that might lead to insight about something completely unrelated.
Great blog, BTW. I just found my way here the other day and keep stopping by… it’s, it’s like an addiction.
You know who kills me in this recession debate…E-C-R-I. These dudes profess over and over again to be ahead of the curve and each week they keep hemming and hawing. They sound no better than Zandia the tarot card reader down the street. There is a chance (whatever the number) that we are already in a recession, and they still can’t quite call it.
What a bunch of fakes.
Are they sure that’s not 48.5 % ?