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The Case Against Economists…

Dear Reader,

Whenever despair slumps our shoulders and the sorrows of the world gnaw our liver… we can rely on CNBC to bring us up:

“Latest Data Show the Economy Ended 2019 on a Strong Note, Putting Recession Fears to Bed.”

Thus we are caressed, soothed, cheered, lifted.

And mortified.

When fear goes to bed… we vault instantly up from our own, hemorrhaging icy sweat.

That is because danger is highest when the guard is lowest — when fear dozes and snoozes.

A Jinx?

CNBC continues in the same lovely, terrifying vein:

The fourth-quarter growth scare is a thing of the past, as the U.S. economy looks set to close the books on 2019 with a solid rise.

Manufacturing and trade reports Tuesday confirmed that GDP is on pace to rise more than 2% for the period.  An Atlanta Fed gauge estimates the gain at 2.3%, better than the 2.1% in the third quarter and enough to close out the year with [an] average quarterly gain of about 2.4%.

While that would mark a slowdown from the 2.9% increase in 2018, it would still be indicative that the decade-old expansion is alive and well and prepped to continue into 2020.

Just so. But we might remind the joymongers that recession is nearly always an invisible menace.

It often comes in on tiptoe… like a noiseless thief in the night.

The Shockingly Short Route From Expansion to Recession

As we have written before:

Periods of jogging, even galloping, growth may immediately precede recession.

We invite you again to consult the following dates. Each reveals the real economic expansion rate — the economic growth rate adjusted for inflation — immediately before recession’s onset:

  • September 1957:     3.07%
  • May 1960:                2.06%
  • January 1970:          0.32%
  • December 1973:      4.02%
  • January 1980:          1.42%
  • July 1981:                4.33%
  • July 1990:                1.73%
  • March 2001:             2.31%
  • December 2007:      1.97%.

(Again we acknowledge Lance Roberts of Real Invest‍ment Advice for the data).

No Indication of Recession “Anywhere in Sight”

Review the figures. You are immediately seized by this strange and remarkable fact:

Recession has followed hard upon jumping growth of 3.07%, 4.02%… and 4.33%.

“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”

Let the record further reflect:

Growth ran 2% or higher immediately prior to five of nine recessions listed.

Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects Q4 2019 will turn in 2.3% growth when the tally comes in Jan. 30.

What was GDP before the last recession — the Great Recession?

It was 1.97% — a workable approximation of the rate presently obtaining.

“Very, very few recessions have been predicted nine months or a year in advance,” affirms economist Prakash Loungani.

Adds George Washington University economist Tara Sinclair:

“There’s no economic data or research or analysis that suggests we can look 12 months into the future and predict recessions with any confidence.”

The facts are with them…

A Failure Rate Second to Few

The world has endured 469 downturns since 1988. How many did the IMF see coming?

Four.

This we have on authority of one Andrew Brigden, chief economist at Fathom Consulting.

But perhaps IMF economists are uniquely blinded and botched. Their private-sector brethren may enjoy superior vision. Private-sector economists are, after all, closer to the field of action.

But the record indicates private-sector economists are equally sightless, equally unable to penetrate the fog of data that surrounds them.

Between 1992 and 2014… 153 combined recessions came to 63 countries the world over.

How many recessions did private-sector economists spot coming — as a whole?

Five.

What is more, these bunglers generally undershoot recession’s severity.

Do we condemn the erring and wayward vision of professional economists, their phantom vision?

No. We question their value, certainly. But we do not condemn them.

“A Bedlam of Unpredictability”

The economy is a bedlam of unpredictability, an infinitely complex Rube Goldberg contraption — a chaos of billiard balls in endless and delirious collision.

Try to keep track of it…

A cue ball goes careening into a rack. A six ball lights out in one direction. A nine ball strikes out in a second, a four ball in a third…

A three ball goes knocking into an 11 ball, a two ball into a seven ball, a one ball into a 14 ball, a five ball into a 12 ball, a 13 ball into an eight ball, a 10 ball into a 15 ball…

Each in turn shoots in a random direction. Each then runs into another previously sent on its own indeterminate course.

Another dizzying chain reaction begins… with its own set of imponderables.

Into which pocket will each ball drop ultimately?

The answer is not only difficult to determine at the outset. It is impossible to determine at the outset.

The number of variables is endlessly boggling.

And so the economic outcome is impossible to determine too far out. And for the same exact reason.

As well hazard the winner of the 2096 presidential election… the number of angels that can fit on a pinhead… or the precise number of rocks in a senator’s skull.

Besides, we are in no position to mock the faulty psychic eyesight of economists…

A Prediction, Horribly Failed

That is because our own crystal gazing gives a consistently false image. For instance:

Roll back the calendar — to last Jan. 3.

The stock market had just come within one whisker of correction, defined as a 20% stagger.

We believed the curtain was coming down at last. We divined the Dow Jones would close 2019 at roughly 18,000… and the S&P near 2,000.

But we underestimated the Federal Reserve’s ferocious response and the vast pull of its magnetism.

Jerome Powell went into his trick bag. And our apocalypse went into oblivion…

The Dow Jones concluded the year above 28,500; the S&P above 3,200.

This year we tempted fate further yet. That is, we came out flat-footed with a prediction of the future, 10 years out.

We claimed the S&P will end this newly hatched decade between 1,500 and 2,300.

Today it floats at 3,265.

We claimed additionally the Dow Jones will be similarly trounced percentage wise.

Bulls, take heart! You need only glance at our record if concerned.

But come back home…

Few respectable economists forecast recession this year — or a stock market calamity.

And look at their record…

Regards,

Brian Maher
Managing editor, The Daily Reckoning


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