The Unassuming Economist

From The Irish Times:

“The US economic expansion, now almost 10 years old, is within seven months of becoming the longest in history. However with stocks falling into bear market territory last month amid mounting fears regarding global growth, is a recession around the corner for the world’s biggest economy?

The year began with stocks enjoying a strong rebound while Merrill Lynch’s latest monthly fund manager survey shows only 14 per cent expect a global recession in 2019.

Still, the “overall judgment of financial markets is that recession is significantly more likely than not in the next two years”, warned Harvard professor and former treasury secretary Larry Summers earlier this month, citing bond market movements, softening commodity prices and widening credit spreads.

Globally, most equity markets have fallen into bear markets notes Goldman Sachs, and almost all have experienced double-digit corrections.

Bulls point out that while the stock market is meant to be a leading economic indicator that anticipates the future, it is far from omniscient and has, as Nobel economist Paul Samuelson once quipped, predicted nine of the last five recessions.

Still, there’s no shortage of concerned experts. Summers thinks there’s “better than a 50/50 chance” of a US recession in 2020. “It wouldn’t surprise me at all if we slipped into a recession real soon,” says Nobel economist Robert Shiller, who famously foresaw the popping of the late 1990s technology bubble as well as the US housing crash that ushered in the global financial crisis.

Economist polls

The US economy is expected to continue growing in 2019 but concerns are growing. There is a 40 per cent chance of a US recession in the next two years, according to a Reuters poll of economists last month. A more recent Bloomberg economist poll found a quarter expect a recession in the next 12 months – the highest number in seven years, and one that closely corresponds to economist polls conducted by CNBC and the Wall Street Journal.

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Still, economists rarely see recessions coming. Only two of the 60 recessions recorded (in 77 countries) during the 1990s were predicted a year in advance, according to a 2008 paper by the International Monetary Fund’s (IMF) Prakash Loungani, and 40 were not spotted just seven months before onset. Forecasters are too slow to update their forecasts and are “also slow to absorb news about developments outside their own economies”, leaving the impression they are “chasing the data rather than being a step ahead of it”.

The IMF updated its analysis last year, but the conclusion was unchanged: forecasts are revised too slowly and while forecasters are “generally aware that recession years will be different from other years”, they miss the magnitude of the downturn until the year is almost over.”

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