An Ugly Forecast That’s Been Right Before
The stock market offers its predictions, and, occasionally, it’s even right. As the economist Paul Samuelson once put it: “The stock market has called nine of the last five recessions.”
Economists have an even worse record, particularly when it comes to predicting downturns. In 1929, for instance, the Harvard Economic Society declared that a depression was “outside the range of probability.” Whoops.
Then there is the matter of the last recession. With the benefit of hindsight, we now know that the downturn began in December 2007. Few people realized it at the time. A survey by Blue Chip Economic Indicators that month found that, as a group, economists believed that the economy would grow by 2.2 percent in 2008. Instead, it began to shrink.
Are we heading into another recession now? Again, the consensus says we’re not.
But at least one organization with an exceptionally good track record says another recession may already be here. That is the Economic Cycle Research Institute, a private forecasting firm based in Manhattan. It was founded by Geoffrey H. Moore, an economist who helped originate the practice of using leading indicators to predict business cycles. Mr. Moore died in 2000, but the team he trained is still at work.
Relying on a series of proprietary indexes, the institute correctly predicted the beginning and the end of the last recession. Over the last 15 years, it has gotten all of its recession calls right, while issuing no false alarms.
That’s why it’s worth paying attention to its current forecast. It’s chilling: as bad as the economy has been, it’s about to get worse.
In the institute’s view, the United States, which is struggling to recover from the last downturn, is lurching into a new one. “If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer.
It’s just a forecast. But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians. Millions of people who lost their jobs in the 2008-9 recession are still out of work. And the unemployment rate in the United States remained at 9.1 percent in September.
More pain is coming, says Mr. Achuthan. He thinks the unemployment rate will certainly go higher. “I wouldn’t be surprised if it goes back up into double digits,” he says.
At the moment, the institute is sticking its collective neck out.
Compare the institute’s forecast with the latest Blue Chip survey, which was released on Friday. In it, the consensus is that the economy is slowing, but still growing modestly, and that it will continue to do so. On average, the economists included in the tally foresaw a growth rate of 2 percent in 2012. In January, the consensus prediction for 2012 was a growth rate of 3.1 percent.
Economists have been ratcheting down their projections, recognizing that the recovery has been so weak that it won’t take much to set the economy back.
A dark cloud hovers over the euro zone. Greece is increasingly perceived as likely to default on its debt, causing as-yet-unknown problems for the global financial system. Spain, Portugal and Ireland are already in downturns. Last week, Jan Hatzius and Dominic Wilson, two Goldman Sachs economists, predicted that France and Germany would soon fall into a “mild recession,” contributing to a slowdown in the United States, where they put the odds of a new recession at 40 percent.
In Congressional testimony last week, Ben S. Bernanke, the Federal Reserve chairman, was also downbeat. He said that the economy was “close to faltering” and that the Fed had lowered its own forecast, adding that the Fed is prepared to intervene as needed. He did not predict a recession, however.
Mr. Achuthan, on the other hand, says that the gross domestic product rate is likely to go negative by the first quarter of 2012, if not sooner. He told me last week that he couldn’t tell exactly when the recession would start — or whether it had already begun. The institute made its recession call only after an array of economic indicators showed a “pronounced, pervasive and persistent” downturn consistent with a recession, he says. By contrast, in the summer of 2010, when some market bears interpreted the decline in one of the institute’s indexes as a signal that a recession was in the offing, the institute said the pattern pointed not to recession, but only to weakness.
Now, he says, the pattern is clear.
This time, Mr. Achuthan says, a host of leading and coincident indexes — those that suggest activity down the road, and those that measure current movements —are all pointing strongly toward recession.
The institute’s U.S. Leading Diffusion Index, for example, has dipped into territory that, with only one exception, would have signaled the recessions of the last 60 years. The single exception was in a short-lived downturn in 1966-7.
In addition, its U.S. Coincident Index has moved into territory that would have signaled recessions over those six decades, with three exceptions. Those were dips in September 2005, after Hurricane Katrina; in March 1993, after a huge storm on the east coast of North America, and in July 1952, after a steel strike. In none of those cases did the two indexes reach recession territory at the same time, as they have now, he says.
TAKEN as a whole, he says, these and other indicators are quite clear. “We’ve entered a vicious cycle, and it’s too late: a recession can’t be averted,” he says.
Unfortunately, this isn’t the end of the institute’s gloomy prognostications. What’s worse, he says, is that the business cycle appears to have become shorter than it was from the mid-80s until the start of the last recession, an era that has sometimes been called “the Great Moderation.”
For the foreseeable future, he says, “more frequent recessions are likely to be the norm.”