This is the sort of post Dean Baker often writes, “New York Times features economists who missed the housing downturn,” although this time, the subject is the outlook for 2009.
Now in fairness, the author, Louis Uchitelle, puts in far more caveats than one normally sees in this sort of piece. In fact, it could be read as being coded; “Yes, all the usual suspects say the economy will bottom out in July, but the factors that made them wrong in calling the severity of the downturn may well apply yet again.” Indeed, Uchitelle, himself an economist, gives a short-form discussion of why their models might not work well in times like these and uses turns of phrase that signal considerable caution, such as “for this rosy picture to play out….if the dominoes fall the right way”.
But if you read the piece superficially (as I assume most readers do) the piece says clearly that the majority of professional forecasters expect recovery to begin in the second half of the year. They also see unemployment peaking at 8 or 9% (the investor crowd I chat with, which BTW is cautiously long stocks, sees unemployment peaking markedly higher, in the 10-12% range).
While the article does quote Nouriel Roubini at some length (and Roubint sees the downturn lasting through all of 2009 and only a very anemic recovery in 2010), it comes off as an outlier. Indeed, the lack of corroborating views undermines what Roubini has to say.
I wonder why Uchitelle and others don’t fess up to what may be the dirty little secret of forecasting: at least according to Mark Thoma, who teaches macroeconomics, the models are good at projecting conditions over the next six months, and are pretty unreliable beyond that point.
Uchitelle does go to some length to give other reasons why the pros performed so badly last year:
But Mr. Roubini is not among the economists surveyed by Blue Chip Economic Indicators. These professional forecasters are typically employed by investment banks, trade associations and big corporations.
They base their forecasts on computer models that tend to see the American economy as basically sound, even in the worst of times. That makes these forecasters generally a more optimistic lot than the likes of Mr. Roubini.
Their credibility suffered for it last year. They did not see a recession until late summer. One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending.
Those models also take as a given that the natural state of a market economy like America’s is a high level of economic activity, and that it will rebound almost reflexively to that high level from a recession.
But that assumes that banks and other lenders are not holding back on loans, as they are today, depriving the nation of the credit necessary for a vigorous economy.
“Most of our models are structured in a way that the economy is self-righting,” said Nigel Gault, chief domestic economist for IHS Global Insight, a consulting and forecasting firm in Lexington, Mass.
Uchitelle is smart and fair-minded. I suspect he felt he had to report on what mainstream forecasters were coming up with, almost as a matter of convention and consistency (the Times as newspaper of record). He tells us that they work for big financial firms and corporations, which means they have a bullish bias (downbeat scenarios would not be good for sales).
So the article is a piece of deconstruction, and you can find confirmation for either the optimistic or pessimist case in the article. But while Uchitelle did go to some length to offer suitable caveats about the professional forecasters, the piece nevertheless presented them as the establishment, with presumably the weight of authority behind them.
And there may be other reasons for Uchitelle’s manner of presentation. An investor met socially with a good-sized group of investors and economists last summer. He was struck by how what they said privately was far more downbeat than what they were serving up for public consumption. Thus there may be other economists who harbor considerable reservations in private, but are not willing to stick their necks out, both to avoid being part of the problem (feeding investor and consumer worries) and knowing full well that any forecast now is dubious, given the considerable uncertainty over the nature and scope of government action here and overseas.
Welcome to the TinkerBell economy. If we all believe and clap hard enough, the hope is that it will pull through.
But the Times itself, in another article today, “Desperate Retailers Try Frantic Discounts and Giveaways,” gives plenty of reason to question the upbeat forecast:
An era of desperation marketing is at hand, with stores and automobile dealerships adopting virtually any tactic that might grab the attention of frightened consumers.
After one of the worst holiday seasons in decades, businesses are doing whatever they can to clear their shelves and make way for spring merchandise. Sales of 50 percent off stopped capturing the attention of customers weeks ago, so stores are layering discounts on top of discounts, and trying to lure shoppers with promises of giveaways, bulk bargains and other gimmicks.
“Retailers are trying everything in the book,” said C. Britt Beemer, chairman of America’s Research Group, a consumer research firm. “You’re seeing things like, ‘Buy one, get two free.’ That’s just unheard of, and the item you’re buying isn’t even full price.
The second article neglects to mention that discounts this severe may condition consumers to expect them (or at least far deeper than previous norms). That in turn would lead them to hold off from buying till end-of-season, If that happens, deflationary behavior (postponing spending out of the expectation that prices will fall) may take hold, not via waiting for reduction in nominal prices, but for very deep discounts.
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Thank you for this exposition.
I’ll miss the New York Times but they deserve to die along with their fascist masters.
He was struck by how what they said privately was far more downbeat than what they were serving up for public consumption.
As Keynes said, most of the time its better to be conventionally wrong than unconventionally right.
But if you read the piece superficially (as I assume most readers do) the piece says clearly that the majority of professional forecasters expect recovery to begin in the second half of the year.
Nominal growth might resume in November or December, but the NEBR and pocketbook scoring will say otherwise.
That’s what happens when you rely on government statistics to guide your thinking.
What conclusion will the academics draw as the Federal Reserve and Treasury refuse to tell us where the money went?
Maybe the talking heads are part of the problem.
Even though Roubini didnt mentioned much in this NY times article he does serve the interests of the establishment. He advocates Keynesian methods to solve this crisis and is a member of CFR.
‘investors cautiously long’.
There is no fundamental reason to think that corporate profits will increase vs expectations 2 months ago. There has simply been a pause in the aftershocks of the credit crisis. If 2009 is as calm as December was, then I will regret not beging long too.
It is certain that more dominoes are falling in 2009. Further ruptures in international trade will start another series of shocks to the financial system.
VIX fell below 40, and that was my trigger to buy broad index puts. I have had 2 such triggers in the last twelve months – points when I measure complacency getting ahead of the facts. Humans are naturally optimistic, have short memories, and markets are not efficient.
“depriving the nation of the credit necessary for a vigorous economy”
To me it seems banks have received a mortal wound and are incapable of thinking anything else than how to save themselves. Organisations and humans don’t differ much in their behaviour: the world/economy/other people may go to hell if I only can keep what I have and stop bleeding. So, expecting everything to return to normal is rather optimistic.
I have been hoping that holidays would inspire Yves to one of those brilliant editorials that take a little distance from the huff and puff of everyday news. To me, right now, it seems all are quite lost and the debate going on is mostly about what went wrong and why – and even there, no clear agreement exists. A multitude of culprits were on the move, so everyone can pick their pet peeve and start pecking. It is a captivating pursuit, but also a trap. Pecking all the nasty herd to bleeding wrecks will not change the situation. The nasty herd has already received a deadly blow, and they have done it to themselves.
What i am looking for now, is insight into the fundamentals of economy. Production, because without that, there will be nothing. Exchange, because that is one of the cohesive forces of human society. How can these things be supported in circumstances where banks and credit are obstacles rather than helpers?
I feel i am witnessing a big move in history: capitalism is collapsing. Right before communism collapsed, there was a short period called glasnost, when all of a sudden everybody started to openly talk about the problems the soviet system was having. The idea was that by acknowledging the problems measures could be taken and the system could be saved. But that did not come to pass. We are seeing into the ugly core of capitalism right now, and many seem to think that now reform is possible and the system will rise up more healthy than it was. I do not believe in this.
My question is: How do we hold on to human civilization when banks and credit are out of the game, and state greatly impaired because unemployment and shrinking economic activity cuts into ability to tax?
You are quite right about the behaviour of professional economists. I worked for an UK industry association in the early 90’s at the end of our last great boom. There was a great debate about whether we were heading for a hard or a soft landing. Our economic model said “soft landing” and our bosses insisted that we shouldn’t be talking ourselves into recession. So we said “soft landing” loudly and in public.
On the other hand, we conducted surveys of business confidence which was declining precpitously and our 1:1 meetings with our members became ever more depressing. We knew we were in for a severe recession but it would have been professional suicide to say so; both within the association and within the wider profession. It does not do to be labelled a pessimist if you want a career outside academia. We left that to the usual crowd of pessimists (eg Wyn Godly, for those with long memories) who were largely ignored by the mainstream press.
As you report, economic models (and economists predictions) cannot survive abrupt changes in business confidence. This has more in common with catastrophe theories used by civil engineers than conventional statistics.
In July 1990, our members were rubishing our business surveys pointing to recession. They were filling in boxes indicating lower orders but then denying this in public. When they returned from the Summer break, ashen faced to a man, they said “we haven’t had an order in weeks. Why aren’t you forecasting a recession and getting the Government to do something about it?”
Our model (using public data at least a quarter out of date) was still pointing to a soft landing! We quietly overrode this with some suitably dire predictions scrawled on the back of an envelope and sent them to the Financial Times where they made the front page.
Any economist or person who gets MSM column space. mention or a TV appearance usually has an agenda. Why did so many “professionals” seemingly miss the housing or credit bubble? Because they DID NOT want to see it!
Call me a skeptic but too many people seem to think that CNBC and other MSM news outlets exist to provide independent financial info to their viewers/readers. Nothing could be further from the truth! Their real reason for existence is to provide an outlet for their advertisers to reach buyers.
CNBC’s constant parade of industry shills making daily bottom calls isn’t arbitrary, it is designed expressively to assuage buyer’s fears and draw them into the markets. But look at the logo’s behind their heads and you’ll see that many of their regulars are from regional or national brokerage firms. Just as brokerages RARELY issue sell recommendations until after a stock has declined significantly, you’ll rarely see anyone affiliated with a brokerage tell anyone to stay out of the market.
What few investors seem to understand is that Wall Street is run by SALESPEOPLE who make the majority of their income on COMMISSIONS generated by SELLING someone financial instruments. Like any salesperson, Wall Street isn’t in business to talk someone out of a sale but to encourage them to buy.
Most everyone featured in the financial media has some sort of vested interest in attempting to direct the market either up or down. Brokerage firms, mutual fund principles and captive economists will talk to the positives to draw in buyers (increasing their firms assets under management, fees and commissions), short sellers will talk to the negatives because they usually have a position already in place, Cramer wants to sell books and advertising for his show, newsletter writers want to sell subscriptions, traders talk to whatever is currently in their books, etc. All make money around the market and “investors” somehow, someway. When people fail to “invest” their money, a lot of people in the industry see declining incomes.
Even on independent financial blogs, there are many people shilling to reinforce their beliefs, and existing positions. They may be short or long the market or individual stocks. They may want commodities like gold, silver or oil to go up or down and so forth.
As corporations, the financial media such as CNBC or the WSJ don’t really care if people who watch/read and follow the tips of the talking heads or columnists lose money, other than how it might ultimately affect the number of their readers/eyeballs. They all know that a rising market makes people happy and attracts advertisers. Since that is how they make most of their revenue, how they pay the “talent” like Maria Bartiromo (~$1.5 to 4 million annually?) their high salaries, they will do whatever they can to help encourage a positive market, including continually predicting that the bright future is just around the next corner. You don’t want to miss out, do you? [lol]
Any economist or person who gets MSM column space. mention or a TV appearance usually has an agenda. Why did so many “professionals” seemingly miss the housing or credit bubble? Because they DID NOT want to see it!
The point is: It is hard too see a bubble when your paid not to see it. This is not some kind of weird conspiracy theory. It is just about skewness. Even in 2005 or 2006 one should expect a decline in house prices. However, a further increase (median) was more likely. Forecasters have an incentive to forecast the median instead of the expected value, as they are more likely to be proven right an get new invitations to the TV shows….
Great post and great comments everybody.
My sentiments lie with kriistina and Jojo.
Nicolas Taleb in The Black Swan writes extensively on this subject–the ability of economists and “experts” to predict.
What little empirical research is available indicates economists and “expers” do a great job in this realm, almost as good as taxi-cab-drivers.
Michael Pollen (who writes excellent books about food) describes the vulnerabilities caused by going from hundreds of strains of apples to a handful: essentially, the loss of diversity brings with it all manner of exposures to disease, weather, distribution and more. If you like, think ‘thoroughbred horses or dogs’: highly vulnerable because so pure.
Uchitelle’s article reflects the same phenomenon. “Establishment” economists talk to one another — for decades now. The diversity of their views diminish. The level of insight goes dim.
The purified forms of this narrower and narrower uniformity run deep. Look, e.g., at this passage in the article:
“One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending.”
But, as we know now, those same models actually did ride high for years based on emotional factors like the rush of easy credit and rising house prices that so accelerated borrowing and spending.
Our sober, establishment economists just chose to label this earlier condition ‘rational’ and ‘financial innovation’ and ‘free markets’ and ‘shareholder value’.
Why didn’t they see this coming? Because they literally could not see it. Their language and their deeply shared beliefs and behaviors excluded the possibility of seeing it.
That is not intended as an ‘out’ or excuse. These establishment economists are failures. They are professional busts. In a meritocratic world, they would not get hired today — let alone quoted in a responsible news article.
That sort of consequence, though, is more likely to emerge from the workings of markets. We’ve had a huge market failure in the market for ‘economic insight and opinion’.
In theory, there’s an unprecedented opportunity for better products/service/offerings — offerings such as Yves’. For this to happen, though, people like Yves need to actually ‘gain market share’ through effective strategy and so forth.
It might happen. But not by magic. Existing market share (and power) will do what it always does to preserve position — and that includes taking steps to preserve it’s share of voice in articles like this NYTimes one.
Uchitelle seems like a smart, well intended person. He wrote an excellent book on the shrinking opportunities for labor. My guess is that he is open minded enough to be engaged. And, hopefully, he reads Yves and will reach out to her to learn more — and, not just learn, but actually change his approach to who gets quoted, etc.
If an expert or economist who missed the biggest housing bubble in US history or missed the financial/economic disaster until summer 2008 told me my hair was on fire, I would not listen. They should be mocked. I don’t care they were wrong because their computer model blah blah blah. They’re fools passing themselves off as experts.
I have two off subject questions: Since we have been treated to a list of people who suspected Madoff was a fraud, is there any other Hedge Fund out there that is suspicious? Why has nobody examined this?
Secondly, there is much talk of Federal stimulus. Has anybody added up the dollar amount of state and local spending cuts? Los Angeles Unified School District is cutting $400 million alone. I think the federal stimulus will be offset by the local cuts, but I haven’t found a tally of those cuts.
Educated in economics but an ex-journalist by profession I know all too well the instinct for moderation and calm rationality when analysing economic data. After all, for some years at time economies do follow a steady pace, neither too hot nor too cold. But if there is one black swan that cannot and should not be ignored it is when a market starts acting out of character and registering extremes. Tech stocks did this prior to the tech bust with p/e’s at ludicrous levels. In the more recent debacle it was the sudden escalation in debt in the 90’s and into the 21st century, far beyond earlier ratios to disposable incomes. The failure of central bankers and the cohort of professional economists to register that dysfunction, even to rationalise it, was totally inexcusable.
I am already annoyed how “downturn” has wormed its way into the media vocabulary. It is Gordon Brown’s favorite term. As in “oh dear – we are having a downturn. Fancy that, the upturn can’t be far off.”
We in the blogosphere need to fight back and call it for what it is. A systemic credit crisis. A recession bordering on depression. A total regulatory failure. A government spending disaster. Peak-credit.
Don’t let the politicians off the hook! Make them answer for their failings instead of belittle them.
The “Tinkerbell” economy. Genius.
Keith – Hermosa said… “there is much talk of Federal stimulus. Has anybody added up the dollar amount of state and local spending cuts? Los Angeles Unified School District is cutting $400 million alone. I think the federal stimulus will be offset by the local cuts, but I haven’t found a tally of those cuts.”
Krugman has sort of commented on this in a piece he titled “Fifty Herbert Hoovers” – where he suggested that the States should move to deficit spending in the face of declining tax revenues — he seemed to overlook the fact that they can’t get credit and don’t have printing presses – It is know wonder he identifies so many of his articles as “wonkish” an apt description.
http://www.nytimes.com/2008/12/29/opinion/29krugman.html?em
A behavioral model using “animal spirits” and the yield curve that has been accurate in real time over the past two cycles forecasts a turning point in first half 2009. See http://home.comcast.net/~elliott.middleton/forecast/
«surveys of business confidence which was declining precpitously and our 1:1 meetings with our members became ever more depressing. We knew we were in for a severe recession but it would have been professional suicide to say so; both within the association and within the wider profession. It does not do to be labelled a pessimist if you want a career outside academia.»
Well, this post and this comment describe something that is pretty common: sell side economists.
our members were rubishing our business surveys pointing to recession. They were filling in boxes indicating lower orders but then denying this in public. When they returned from the Summer break, ashen faced to a man, they said “we haven’t had an order in weeks. Why aren’t you forecasting a recession and getting the Government to do something about it?”
Well, this whole article describes sell-side economists.
It’s their job — and most economists in the USA are sell-side, for the class of providers of endowed chairs and donations, if not for specific industries.
Jojo, that was a great post. After the 2000 bust, I quit watching CNBC altogether, and occasionally watch Bloomberg, but I get most of my information from the blogs, which served me well over the past few years.
From what I’ve read, the same economists that never saw this coming are still on the show, proclaiming a turnaround in the second half, as if they have any credibility. For laughs, check out Barron’s roundtable when that issue comes out.
This bear market still hasn’t wrung all the pollyannnas out of the market. Games are still being played, like the end-of-month ramp jobs as the SEC looks the other way. We still need a thorough cleansing to get rid of all the rot that exists.
I think you are grossly unfair to Louis Uchitelle. This was the NYT version of Dean Baker’s blog.
The first paragraph: “Economics as the dismal science? Not in some quarters.” The next four paragraphs start: “In the midst of the deepest recession… “For this rosy picture to play out, they are counting on… They say that will get the economy moving again in the face of… If the dominoes fall the right way…”
This is not an article about the future of the economy. This is an article about how establishment economists are out of touch with reality.
The headline in the print edition: “Forecasters See Fast Recovery; Others Doubt Their Eyesight.” The headline writer read it the same way I did.
You owe an apology.
“They base their forecasts on computer models that tend to see the American economy as basically sound, even in the worst of times.”
“They” are absolutely basing their forecasts on models that are for the time being broken and will be for the foreseeable future. For instance, Brian Wesbury, a credible analyst, posits “stocks are dirt cheap” based on the Feds treasury yield model. Well, that model is broken and has been all throughout 2008. The cash-on-the-sideline model was also broken all throughout 2008.
If the models were valid, we’d be loving how dirt cheap stocks were when the SP500 at the Q1 08 lows in the 1250’s.
I could cite other models that would indicate stocks are quite expensive, for example the ttm p/e for the SP500 is roughly around 20 today. This is downright expensive when half the dang index is financials and energy stocks. Yoy comps in many energy stocks will suck for the 1st 3Q’s of 09. And financial stocks, hmmm let’s see….how are they going to do in 09? Well, I am optimistic that they will lose less money in 09 then they did in 08. They could even make money on the yield curve that will more than offset their rotting balance sheets. But wouldn’t it just be better to wait until they have disposed of the rot or the rot becomes fully decomposed by say when housing prices stop going down. At least then there will be a floor to their balance sheet instead of a black hole.
Best to know the strengths and weaknesses of the models before speculating and forecasting with them. AT least this way you know how to use the model as a tool.
@ Kristiina,
The fundamentals are rotten for the economy. The UE rate is going up, Obama fears double digit UE rates and that he may not be able to offset it with his econ recovery package. That is realistic.
If it is production you are looking for, we exported that to China. Obama’s revival of the “Buy American” slogan rings hollow because we haven’t the capacity to produce are way out of this mess
We creatively destroyed our capitalist model in 2008 in perfect Schumpeterian fashion. Now, the U.S. government is expanding its role to hopefully protect capitalism from its own “inherent debt-deflationary tendencies”
But to answer your question, human civilization does not need banks and credit to survive. That said, you can rest assured these institutions will be surviving much longer than you or I!
@ keith
“I think the federal stimulus will be offset by the local cuts, but I haven’t found a tally of those cuts.”
what I can tell you is that GS has been advising their clients in Q4 08 to short 11 states they think are in or will be in a depression. I only hope for GS’s sake they aren’t also underwriting the same.
The point is that the GS data suggests one-fifth of the country is flirting with Depression. Many cities and villages throughout 2008 have been going bankrupt, saying “We’re broke.” More will follow.
Two states, one of which is Indiana lack funding for Unemployment checks and are relying on Federal aid to pay the UE benefit checks. How they came to lack sufficient reserve’s I haven’t a clue, but by the same token, it should not come as a surprise that states are lacking the funds for these sorts of funding schemes. Social Security and Medicare are other funding schemes set to blow up on us in the next ten to twenty years.
But I digress, the federal stimulus must be “more than proportionate” than the shrinkage in the business and consumer sectors if it is to have any measure of success at all “offsetting” and combating capitalism’s “inherent debt-deflationary tendencies”
See McCauley’s latest missive for an elaboration on these musings
Ben Ross,
You owe an apology. Yves bent over backwards to say that Uchitelle was working within NYT constraints and had to write in code. But the more important fact is that the requirement to write in code gives more weight to the mainstream, incorrect view, by virtue of placement and the dearth of opposing experts.
«The point is that the GS data suggests one-fifth of the country is flirting with Depression.»
The rust belt has been in a depression for at least 15 years, and the rest of the country has been in a recession (if one uses proper deflators and unemployment numbers) for the same amount of time. Almost all the meager growth that may have have happened in the past 15 years has been in financial services which is heavily geographically concentrated and a couple of other similarly localized sectors.