Economic Forecasts: Why Is There No Bottom?

by: Jeff Miller

Since the stock market seems to have no bottom, investors want to know why. We shall consider this in a series of articles. This is Part One, dealing with economic forecasts.

What People Read

We know that individual investors are frightened, a perception fueled by stock market results. For most, the stock market is the barometer for economic forecasting.

Fueling this is the popular perception of the economic prospects. The New York Times (NYSE:NYT) pulled together a number of op-ed pieces, asking When Will the Recession be Over?

This is powerful material, drawing together the opinions of many experts. Readers should review all of the pieces. We know from reader feedback, emails, and calls that it was an important article.

Jim Grant, erudite, polished, and persuasive, tells us, "don't ask when."

Stephen Roach, of Morgan Stanley (NYSE:MS), predicts late 2010 or 2011.

A. Michael Spence, the Nobel-Prize winning management Prof from Stanford says "unusually long and deep global recession through 2010." That is if governments get their acts together.

William Poole of the Cato Institute rails against unwise government bailouts, which he believes are making things worse.

Eric Schmidt, Chairman and CEO of Google (NASDAQ:GOOG), expects signs of life later this year, and a resumption of normal lending in 2010, with the Internet playing a key role.

Financial writer George Cooper sees a financial drag extending into the next decade.

Harvard historian Niall Ferguson sees two years of contraction and two lean years after that.

Princeton Econ Prof and former Fed Governor Alan Blinder sees growth resuming in the fourth quarter of 2009, but with many caveats.

University of California-Riverside economists Marcelle Chauvet and Kevin A. Hassett take a probabilistic approach based upon past recessions, and see the probability of the current downturn lasting through 2009 at 50-50.

University of Maryland economist Carmen Reinhart focuses on a return to normal growth, setting out four years or more as the time frame.

NYU Econ Prof Nouriel Roubini sees a three-year recession, with chances for much worse.

A Different Approach

A different approach to the problem is to use a continuing panel, not selected for star quality. The Wall Street Journal forecasting survey provides such a comparison.

The Journal article on the latest survey carries a gloomy headline, Economists' U.S. Outlook Dims. The Journal surveys 52 economists, and reports on 2009 as follows:

The average forecast now sees growth in the third quarter at 0.7%, less than half the rate expected last fall. The fourth-quarter picture has also darkened, but just slightly, to growth of 1.9% from the 2.1% seen in November. Five economists see growth declining through the fourth quarter of 2009; they say the current consensus outlook, which says the recession will end in August as GDP growth returns positive, is far too optimistic.

Briefly put, the economic panel has reduced estimates for growth, but is dramatically more positive (less negative?) than the New York Times group. They see the monthly job loss for the year as 183,000 per month, much better than current rates, and unemployment peaking at 8.8%

A key difference is attention to the stimulus package, which they see as saving about 90K jobs/month. Interestingly some say it was too large, and others, too small!

Our Take

The entire media approach is very negative. The New York Times has an all-star cast of experts, but it leaves us wondering a bit. When an article like this appears, it creates an illusion of scientific sampling. We are also bothered by the lack of attention to the dramatic government intervention begun many months ago, policies with known lags. The peak of the crisis came right after the Lehman fall and credit freeze.

None of the economic models have any experience with the myriad of Fed programs, not to mention the stimulus package.

Models can be quantitative or qualitative, but are always based upon experience. None of us have the relevant experience for this particular crisis, so our models are suspect. It is also natural to highlight experts who have been right -- those who "got it" in the popular Street parlance. The question is whether the skills involved in predicting the problem are also the right skills for identifying the possible solutions.

We find the WSJ panel to be an interesting counterpoint. The investment prize will go to those who can identify economic indicators showing any bottoming signs. With equity prices at depression levels, even a moderation in the depth of the recession could be good news.

Meanwhile, most investors are focused on the headlines.