Predicting a Recession: Apocalypse When?

by: Eddy Elfenbein

As long-time readers of this site know, one of my pet peeves is the lack of balance in accountability between overly bearish and overly bullish predictions. Simply put: You can say that the sky is about to fall until your blue in the face, and be completely wrong, and few people will hold you accountable. As long as you’re vague about time and stress the “about to” part.

On the other hand, if you’re bullish and wrong, you’ll be mocked until the cows come home. Or the bears, whichever comes first.

Nouriel Roubini is probably the most prominent bear on Wall Street. I like his analysis even if I don’t always agree with it. Of course, I don’t read people to have my views confirmed. I want them challenged.

I do want to point out that Roubini’s predictions haven’t exactly been spot on. In June 2006, he wrote:

So, this Q2 GDP report is as bad as it could be. I thus stick with my prediction that, by Q4, the growth rate will be close to zero and by early 2007 the U.S. will be in a recession. Panglossian optimists have been proven wrong again. They'd better start adjusting their wishful-thinking forecasts of H2 growth (still close to a 3% consensus) to a reality of an economy rapidly slipping into a nasty recession.

A wee bit off, no? To be fair, his views are more complicated than this bit suggests. I’m not trying to pick on him. Instead, my point is to show that it’s easy to get carried away with your hypothesis, and suffer from confirmation bias.

One of the problems is that even if you’re right, you still can be wrong. The U.S. economy is titanically complex. There are millions of consumers making several economic decisions every day. Still, the real economic growth rate for the past 40 years has been about 3%. To be a bit more refined, it’s about 3.07%. What’s truly surprising it how little it varies.

Here's a look at GDP growth (blue) compared with a 3.07% trend line (red). I apologize that the table is lame but that's my point.

So even when these “crises” do come along, the overall economy is incredibly resilient. My prediction is that at some point, a recession will come along. It will be short and unpleasant, but after it, a recovery will follow.

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