Next Recession and Economists’ Forecasts are Ineluctable

The “darndest” things they say should be handed over to economists. Recently, in a survey, a group of economists put the odds of the next recession occurring within the next 4 years at nearly 60%.Let us see today how worthless forecasts tend to be, and to be precise why economists’ long-term predictions are so uniquely futile.

Their Predictions are Slightly more Futile than your local Weather Forecaster:

To begin with the statement -“a recession might occur within the next 4 years” itself is baseless as it contains almost no information to back it. The 20th century witnessed 20 recessions. One was every 5 years, on average. This means that if you predict a recession within the next 4 years it is likely you will be correct on average about 80% of the time.

Economists have a habit of Forgetting the Broader Context of Economic Cycles:

Ironically, being economists they frequently forget the broader context of the economic cycles. Thereby making forecasts based on merely extrapolating current data. Maybe they hate to admit the fact that “they don’t really know when the next recession might occur”. For instance, they failed to anticipate the 3 most recent recessions of ‘1990, 2001 and 2007’, even after they had commenced. In the years 2001 and 2007, Nifty fell as low as 849.95 and 4448.50 respectively. In 2013, recession didn’t hit the economies especially because of free money which was created by the central banks who began the concept of ‘zero’ interest rates in relation to loans.

What does the Economic Cycle Research Institute have to say about this?

The Economic Cycle Research Institute (ECRI) says that economists tend to use models which reduce a complex economy to an inflexible set of largely backward-looking relationships. As ECRI notes, extrapolating from the recent past is a disaster recipe for being astounded by the next turn. ECRI uses the leading economic indicators to offer some insight into when the economy is “first slowing its expansion”, then slanting into contraction. Another more useful approach is to look at various data points that when taken together have a strong correlation with the beginning of earlier recessions.

Other Forecasting Models:

The Federal Reserve researchers look at ‘17 monthly variables chosen to throw light upon the different aspects of the economy’. The Federal Reserve Bank of Cleveland also observed statistical models that predict 12-month-ahead recession probabilities. Also, New York’s Reserve Bank has developed its own model. They all discovered that while various models could be improved by fine-tuning the indicators or metrics tracked the limitations of the forecasting models decrease a lot at time horizons of a year or more. The simple reason is that the standard economic measures (the yield curve, corporate profits, consumer confidence surveys, credit spreads) they all utilize to predict recessions alter a lot from month-to-month and quarter-to-quarter.

The Current US Economic Cycle:

The current US economic cycle is a long-slow recovery from a deep recession that began in December 2007 and was severed by the credit crisis of 2008-09. The Wall Street Journal said that the expansion had now continued for period of 88 months, making it the 4th longest period of growth in records stretching to 1854. However, expansions don’t just decay and die, something fundamental has to occur to arrest the progress. And records by nature are born to be broken.

Conclusion:

Forecasts of a recession arriving during the next 4 years are nothing but a waste of print and pixels. The one benefit which these predictions are that they act as ‘reminders’ which keep making us aware from time to time that there is always hurricane coming in future to strike world economies.

Source :  

https://www.dynamiclevels.com/en/blog/next-recession-and-economists-forecasts-are-ineluctable