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| Friday, November 20, 2009 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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December 24, 2008 12:01 AM ET
Which of two groups—economists or the general public—came closer to predicting the recession? Surprisingly, it looks like the Joe Six Packs of the world were better economic prognosticators than the elbow patch set. In November 2007, a Gallup public opinion poll found 54% of Americans believed a recession would probably or definitely occur in the next 12 months. By comparison, a Wall Street Journal survey of 52 economists conducted two weeks later found that, on average, the professionals put the chances of a recession at 38%. In reality, the longest recession in at least 26 years began in December 2007, almost immediately after the two surveys were conducted. A majority of the public got it right. Many economists did not. “This recession, economists have done even worse than usual,” said Franklin Allen, co-director of Wharton Financial Institutions Center at the University of Pennsylvania. “They muffed predicting the crisis.” Earlier this month, the non-profit National Bureau of Economic Research announced that the economy has been in recession for a year. If the downturn extends past April, as most economists expect, it will be the longest recession since the Great Depression. It took most economists several months to identify the recession once it unofficially began. In January, the Journal’s panel of Wall Street, academic and industry economists put the chances of a recession at less than 50%. They did it again in February. In fact, the majority of the paper’s experts didn’t declare a recession until March, around the time that monthly retail sales started to plunge and job losses began to mount. Even more galling to some observers, though, was the failure of the Bush administration, including Mr. Bush himself, to acknowledge the downturn well into this year. “They did not awake to the recession risk until it was well underway,” said Lakshman Achuthan, managing director of the Economic Cycle Research Institute. While it’s the job of many economists to forecast the future, they can take solace in knowing they weren’t the only ones to get it wrong. Chief executives of top U.S. companies, who some think may be better grounded than economists, also were overly optimistic. A Business Roundtable survey of 105 CEOs in November 2007 found that they expected a 2.1% increase in gross domestic product for 2008, a slightly higher growth rate than in 2007. Few economists now expect any growth at all for 2008. The venerable Economist magazine also erred. “America should—just—avoid recession,” Economist editor Daniel Franklin predicted a year ago. “We never know what the future holds, and this period has been one unanticipated shock after another,” said Peter Bernstein, an economic historian and editor of the Economics & Portfolio Strategy newsletter. “Nobody, even the bears, had any sense of how it was going to develop.” Not so fast. A few economists did get it right. Among them: Lawrence Summers, whom President-elect Barack Obama has appointed as his chief economic adviser; Martin Feldstein, who was top economic adviser to President Reagan, and Jeffrey Frankel, a Harvard University economist who is on the NBER committee that declared the recession. “I had never seen a time in my professional career (over 30 years) when the economy was showing so many adverse signals short of having actually yet experienced substantial negative growth,” Mr. Frankel wrote in an e-mail. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, predicted way back in November 2006 that recession would strike sometime in 2007. “The main factor pushing the economy into recession will be weakness in the housing market,” he wrote in a spot-on analysis. How could other economists get it so wrong? "Economists are incredibly reluctant to acknowledge there could be asset bubbles," said Mr. Baker in an interview this week. "If you step out of line and are wrong, you're dead meat. No one will take you seriously again." What's more, some economists and academics did not expect that bubble to burst so soon. “Almost everyone believed that house prices would keep rising, or at least not fall,” said Martin Baily, President Clinton’s chief economic adviser, who is now at the Brookings Institution. “We missed the importance of the over-leveraging and we did not realize how vulnerable the financial system was.” The assumption that housing prices would always rise became embedded in forecasting models, Mr. Achuthan said. Many central banks’ models did not take into account the stability of the financial sector on the premise that “finance is not very important,” said Wharton’s Mr. Allen. The housing slump that began with problems in the subprime sector has been a key factor in the deterioration of both the financial markets and the economy, according to Federal Reserve chairman Ben Bernanke and a number of economists. Falling housing prices and rising delinquencies led to major losses at many financial institutions. One economist whose forecasts were erroneous was Ethan Harris, former chief economist of Lehman Brothers and now co-chief economist at Barclays Capital. “While it is a close call, we do not think the economy will fall into a recession,” he was quoted as saying in the Journal’s February survey. Reflecting on his predictions this week, Mr. Harris said, “The unique component of this recession is that the capital markets crisis has proved resistant to unprecedented monetary and fiscal medicine.” He added that the administration’s decision to let Lehman go bankrupt in September made the economy “unforecastable” and “ensured that this would be a major recession.” Perhaps the last word on the subject should go to Victor Zarnowitz of the Conference Board, whose study of recessions from 1960 to 1991 is in his textbook, Business Cycles. “I don’t know many cases of successful forecasting of recessions,” said Mr. Zarnowitz, who is also a member of the NBER committee that declared the downturn. “Recessions are more varied in origin than recoveries, and much less understood.” He added that there may be a psychological component to forecasting in that many economists do not like to be the bearer of bad news. On the other hand, Mr. Zarnowitz said that because economists depend on the past for their forecasts, they do better at predicting the progress of a recession once it has begun. The Journal’s most recent surveys of economists should thus be taken more seriously than those of a year ago, Mr. Zarnowitz said. Fifty-four economists polled earlier this month said on average they expect the recession to end in June. “Still,” he said, “I would take this with a very [big] grain of salt.”
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