Tag Archives: recession

Looking back at claims to have predicted the Great Recession

Many economists and financial experts claim to have predicted the Great Recession. That’s important, since these are the people we should be listening to.  Oddly, they seldom quote or cite what must be their greatest accomplishment. Let’s look at one such claim, by Steve Keen.

Update: Steve Keen provides additional citations in the comments.

Crystal Ball

First, a background note. By 2006 and 2007 it was clear to many people, not just experts, that the US had a large asset price bubble in residential real estate. Some of the the most obvious symptoms: rising vacancy rates, inappropriate credit extension to borrowers (often fraudulent), and obviously unsustainable prices.

What very few saw was that the collapse of the bubble would send the US into the most severe recession since the 1930. What nobody saw, so far as I know, was that this would spark a global crisis. There were many factors that magnified a sector crisis in America into a global downturn, but the top of the list were the collapse of US and foreign banks. This was unexpected, probably even to senior executives at those banks. The widespread belief as late as early 2008 was that the US might fall into a recession, but that the banks were strong. Banking collapses are the one of the two most common causes of severe economic downturns (wars are the other).

Back to the forecasting game. One economist often cited as predicting the crisis is Steve Keen (retired Prof Economics, U Western Sydney.). He often makes this claim, most recently (and unusually mildly):

Back in the Olde Days, before the global finan­cial cri­sis, when I was one of a hand­ful rais­ing the alarm

Let’s look at the link Keen gives as evidence of his predictive skill: “‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof Economic, U Groningen), Vox, 30 September 2009 (see the full paper here):

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Are conservatives right about the Fed? Is it a malign force in America?

Summary: Central banks have never been more powerful, more significant to the economy, more controversial (although they’ve often been unpopular), or more misunderstood. Today we debunk two of the myths about their evil they do; at the end are links to posts about their limitations.

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World money

Contents

  1. About conservatives’ faux history and economics
  2. About investment bubbles
  3. About the joys of unregulated banks
  4. Instead of the Fed, look at the new banks
  5. For More Information

(1)  About conservatives’ faux history and economics

Conservatives have devised a body of faux history and economics to justify their 1%-friendly public policies. Central to this is Fed-hating.  The 1% uses hatred of the Fed to motivate its troops, while cherishing the Fed as one of its most useful agents. The Fed by design supports the banks’ solvency and profits (hence drawing its governors from bankers and known bank supporters). This contradiction shows how our inability to see the world around us prevents our effective political action.

Let’s examine two charges of the Fed haters:

  1. The Fed creates investment bubbles that distort and disturb the economy — unlike the good old days under the gold standard.
  2. The Fed, and the other bank regulatory agencies, restrain the natural entrepreneurial vigor of the banks.

(2)  About investment bubbles

Economic bubbles occur naturally in free-market systems, occurring often even under a gold standard. Such as the 17th century Tulip Mania (see Wikipedia), the earliest documented bubble (although details are uncertain). There are different kinds of bubbles. Here we discuss investment bubbles, excessive enthusiasm for a specific kind of investment which attracts too much capital, followed by a bust.

The giant UK investment bubbles of the 19th century were more similar to those of our time (e.g., in technology and housing). To learn more about them I recommend reading “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” (26 February 2012) by the brilliant Andrew Odlyzko (Prof Mathematics, U MN; his bio here). Excerpt:

Those {bubbles} of the 19th century lasted for several years, and involved huge real capital investments.

… The British mania of the mid-1820s … involved real capital investments of about £ 18 million in joint-stock companies, most prominently for mines in Latin America, and £ 25 million for loans to foreign governments, again largely in Latin America. The total, £ 43 million, was slightly over 10% of British GDP of that period, comparable to $1.5 trillion for the U.S. today, and was regarded by the British public at the time of the Railway Mania in the 1840s as an almost complete loss.

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Status report on the US economy: where we are, where we’re going

Summary: After a near-recessionary 4th quarter (and the start of the extraordinary QE3), the US economy slowly accelerated during the first two quarters of 2013. Much depends on that growth continuing. With monetary and fiscal policy already running at full throttle, another slump would force ugly choices. Today we survey the confident (but shrinking) forecasts of economists and the unexciting recent data.

“Physicians teach that there are three kinds of spirits: animal, vital, and natural. The animal spirit has his seat in the brain … called animal because it is the first instrument of the soul…”
— Bartholomew Traheron’s The most Excellent Works of Surgery by John Vigon (1543)

Crystal Ball

Contents

  1. Status report on the economy
  2. What the professionals expect
  3. Other posts in this series: waiting for the boom!
  4. For more information about the US economy
  5. Sunrise will come eventually

(1) Status report on the economy

“The Increase of our Foreign Trade … from which has risen all those Animal Spirits, those Springs of Riches that has enabled us to spend so many millions for the preservation of our Liberties.”
— William Wood’s “Survey of Trade” (1719)

Q2 GDP was +1.7%, below the 2.0% “stall speed”. Q3 is forecast to be +2.3% and Q4 a rosy +2.7% (see section 2). The data from June and July shows few signs of an acceleration in growth. In fact there are hints that the economy is slowing. And the doubling of the 10 year treasury yield has not yet had its full contractionary impact.

On the other hand, confidence surveys remain strong — some are growing stronger — which gives comfort to the optimists, such as builders’ confidence, consumers’ confidence, purchasing managers’ confidence. “Confidence” is a proxy for Keynes “animal spirits”. It’s become a new obsession of economists, and the foundation for belief in the stimulative powers of quantitative easing.

Since I lack confidence in confidence surveys as a measure of animal spirits, let’s look at some hard data: coincident indicators of economic activity. These show where the economy was, and what people did rather than what they say they will do.

(a) Freight traffic: slow growth

Traffic is a crude but effective measure of economic activity.

(b) Credit: stagnant

Credit growth long has been a reliable indicator of US economic growth. Look at the YTD numbers in these kinds of lending, per weekly St Louis Fed report:

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Is there a recession looming in our future? Let’s review the evidence.

Summary:  Today we have a status report on the US economy, focusing on the odds of a recession during the next year. This will provide context for the revelations in Friday’s new data festival, which could radically change the picture (so expect no conclusions here).

“You cannot prevent what you cannot predict.”
— ancient wisdom

Economics

Contents

  1. How are we doing today?
  2. What’s the trend?
  3. Taking the temperature
  4. What are the odds of a recession?
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) How are we doing today?

The US economy is $16 trillion component of a $72 trillion world. It seldom rolls over quickly, except from an external shock (e.g., the 1973 oil embargo). No such shock seems likely now.

On the other hand, we only know for sure where the economy was a few quarters ago, not now — despite the confident guesses of professional and amateur economists.

(2) What’s the trend

The US economy has been growing at an average of 2.2%/year since the start of the recovery (Q2 of 2009 through Q1 2013), with slow periods met by government action (fiscal or monetary stimulus).  As of Q2, GDP is 3.9% above the previous peak (2007 Q4).

The last three quarters been well below stall speed: real GDP grew 0.1% in Q4, 1.1% in Q1. and 1.7% in Q2. The scary slowdown in late 2012 drove the Fed to adopt the extreme expansion of the Fed balance sheet called QE3 (since politics have ruled out the more effective and useful fiscal policy).  As a resut, GDP has risen 1.4% during the past 4 quarters. Recovery!

Since the economy was far below stall speed  (<2%) during the past three quarters, we might be in recession now. Especially since economic indicators are often mixed during the slide, then revised downward.

The average revision of GDP from the advance to final revision is 1.2%; the standard deviation of revisions is 1%. So it is possible that Q2 might be revised to a negative number (details here).

(3) Taking the temperature

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The US economy is slowing. Things might get exciting if this continues.

Summary: In an this time of almost unprecedented economic intervention by governments — experiments on a scale never before attempted during peacetime — determining the state of the economy is difficult. Determining the near future of the economic is almost impossible. Determining the distant future requires psychic powers. Today we continue our series of looking at the data and guessing about the future.

“It’s hard to make predictions, especially about the future.”
— Aphorism, origin unknown

Economics

Contents

  1. Accurate economic forecasting is difficult.
  2. The recovery takes a nap
  3. What happens if the US slides into a recession?
  4. Look at the big four indicators
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) Accurate economic forecasting is difficult

“The worst is behind us. … And what did the worst do to us? Slowed growth to 0.5% in one quarter. Boo frickin hoo.”
— M Simon of the Classical Values website, mocking my warnings about the economy. Said on 27 August 2008, just as the economy was about to go off a cliff

The US economy is large, complex, and rapidly changing. Economic theory is immature. Our economic data collection agencies are grossly underfunded. The combination makes accurate forecasts almost impossible, especially detecting inflection points. Even economists find it difficult, proven by the record shown by surveys of economists. The best known are the Blue Chip Financial Forecasts and the Wall Street Journal’s Economic Forecasting Survey (available to non-subscribers here). Neither has ever forecast a recession.

(2) The recovery takes a nap

The US economy has been growing at 2% – 2.5% since 2010, with slow periods met by government action (fiscal or monetary stimulus). The last two quarters were slow growth: real GDP grew 0.4% in Q4 and 1.8% in Q1. Q2 looks to be another slow quarter. The consensus was +2% before the June data started to come in; now estimates are dropping fast (updated July 19):

We use the finest forecasting tools

  • Credit Suisse: +1.1%
  • JP Morgan: +1.0%
  • Bank of America -Merrill: 0.9%
  • Goldman: +0.8%
  • Macroeconomic Advisers: 0.6%
  • Barclays and Royal Bank Scotland: +0.5%
  • Morgan Stanley: 0.3%

We are in trouble if the theory about a “stall speed” is correct — that slowing below roughly 2% increases the odds of a recession. On the other hand, forecasts for second half and 2014 GDP are not being cut, so the gap between first half and second half GDP is widening fast — reflecting confidence about the transient effects of higher taxes, the sequester, higher oil prices, and higher interest rates. Also confidence that consumer spending and business investment will accelerate in the second half of 2013. And, above all, confidence about the wealth effects supposedly created by QE3 (more on this on another day).

In May there were many forecasts for 4% GDP growth in 2015. Now the consensus forecast is 3.0%. Hopes for a boom have dimmed, or been pushed into the future.

(3) What happens if the US slides into a recession?

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Did the US fall into recession during 2012? Are we in recession today?

Summary:  In September 2011 the Economic Cycle Research Institute (ECRI) made a bold forecast of a recession in 2012 for the US economy, unlike the late 2012 boom expected by most economists. The boom never arrived, but perhaps neither did the recession. Today ECRI updates their forecast. Much depends on what the US economy does in 2013.

We use the finest forecasting tools

Contents

  1. Introduction
  2. The latest ECRI report
  3. About the ECRI
  4. Leave a Comment!
  5. For More Information

(1)  Introduction

Here is an important report, somewhat technical but deserves reading in full: “The U.S. Business Cycle in the Context of the Yo-Yo Years“, Lakshman Achuthan, Economic Cycle Research Institute, 5 March 2013 — It’s a brief, less-technical version of the report provided to subscribers (it’s a very expensive service, well-worth the money). Summary:

We are now in the Yo-Yo Years as described by ECRI early last year. Meanwhile, even though some economic data seems stronger on the surface, U.S. Nominal GDP growth is recessionary and we are below a “stall speed” measure highlighted by the Fed.

But first some context about economic forecasting, experts, and the role of consensus thinking in science.

(a) We know where the economy was 3 – 6 months ago, not where it is today. Accurate real time data (eg, new unemployment claims) tends to cover only fragments of the economy. Broad macro data has large error bars and often gets drastically revised — especially at inflection points.

(b)  Accurate economic forecasting lies beyond the current state of the art due to immature theory and the low quality of current data. Plus the rapid evolution of monetary economies makes building reliable models a moving target.  But we need forecasts, and economists do the best they can with available tools.

(c)  Experts’ forecasts tend to come from deeply biased sources, usually optimistic. Government officials value moral-building over truthfulness. Industry sources, such as realtors and investment banks, use bullish reports to boost their business.  The highly political nature of economic policy-making produces more strongly biased forecasts (often contrary to current economic theory).  Hence the value of independent sources like the ECRI (and their peers at the Conference Board and OECD).

(d)  Peoples’ need for certainty and the unreliability of experts fuels the crowd of amateur forecasters, most armed with more self-confidence than knowledge. It’s sad that this junk food for the mind finds such large audiences, since the Internet makes excellent analysis so accessable.

(e)  The monetary and fiscal stimulus applied during the past 5 years has no precedent during peacetime US history, and few precedents anywhere among the developed nations. The size of the stimulus has overwhelmed many market-based indicators of economic health, and perhaps introduced as yet unseen distortions and stresses. This had reduced the effectiveness of the traditional indexes of leading indicators (the ECRI’s WLI, the OECD’s CLI, and the Conference Board’s LEI).

(f)  As often in the sciences (and life) powerful insights often arise not in the consensus but among the fringe of expert opinions. Which brings us to the ECRI. In September 2011 they boldly predicted a US recession in 2012. They’ve repeated that forecast (see links at the end). Today they have updated their forecast, taking a stand against the consensus forecast of a strong recovery late this year and more rapid growth next year (just like the similar wrong consensus forecasts for 2011 and 2012).

(2)  Excerpts from the latest public ECRI report

Opening:

It is now well known from the Reinhart and Rogoff work that, following financial crises, economies tend to experience unusually weak growth. But what this pattern suggested, even before the financial crisis, is that we were set to see a weak economic recovery, in any case.

Because the weakness of the revival from the Great Recession is almost universally blamed on the financial crisis, there is a broad consensus that the economy will return to much stronger trend growth after the deleveraging phase ends. But the implication of “the yo-yo years” thesis is that there is no clear reason for this longer-term pattern of weak growth to go away, even when deleveraging does come to an end. Indeed, the current evidence suggests that we are already in the yo-yo years for the U.S. and most other major developed economies.

It was against this backdrop, in late September 2011, that ECRI made a recession call. A couple of months later, in December 2011, we clarified our view of the likely recession timing, saying that we thought it would begin by mid-2012, but not be recognized before the end of 2012.

We said this because, over the last six recessions, the median lag between the recession start date and the first negative real-time GDP print had been half a year . As it happened, in January 2013 there was a negative GDP print, consistent with our belief that the recession had begun around mid-2012.

Nominal Gross Domestic Product (GDP)

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Did the recession begin in July? If so, expect an ugly 2013!

Summary:  Many US economic indicators have fallen off their peaks, some entering typical pre-recessionary levels. That’s bad, since the fiscal deficit and unemployment are already at recessionary levels. That’s a ugly place to start the downturn.  And the it might have already begun.

The hot-flying US economy

The hot-flying US economy

Contents

  1. The ECRI says the recession began in July
  2. About the ECRI
  3. Economist Gary Shilling also sees a recession
  4. Updates
  5. About Economic Statistics & Forecasts
  6. For More Information

(1) ECRI: the recession began in July 2012

The ECRI is one of the leading US economic forecasting groups. This is a follow-up to their prediction of recession in 2012 made in September 2011, described here.

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The Tell-Tale Chart
Excerpt from a press release of the Economic Cycle Research Institute (ECRI), 29 November 2012.

Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year.

But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.

So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.

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