How to Win a Recession-Predicting Contest

For the last few months, and much longer for some, there has been a barrage of commentary about whether or not "we are already in a recession."  The financial media have continuously polled the public to see what they think, and asked everyone who appeared on financial television.  It did not matter whether the respondent had any forecasting credentials.  Apparently we all want to know what anyone thinks about this important question.

Maria Bartiromo, whose interviews other journalists might well study, draws a careful line.  She does not advance her own ideas and then ask the expert to agree.  Instead, she draws out information.  She does show enthusiasm and encourage her interview subjects.  It is amazing how often she asks exactly the question we are thinking of.  Bartiromo warns that the media fixation on recession could become a self-fulfilling prophecy.  On the Today Show, she made this thoughtful comment:

truth is, [“Today” co-anchor] Meredith [Vieira], it doesn’t matter if
we’re in a recession,” Bartiromo said. “We can talk ourselves into a
recession, and that seems to be what we’re doing right now and that
certainly begets more weakness.”

Meanwhile, a majority of economists now agrees that "we are in a recession."

It Really Does not Matter

There is no light switch that makes things terrible if the economy is in a recession and acceptable if it is not.  Economic data show that we are experiencing a period of economic weakness.  This means lost jobs and lost profits.  It is a permanent loss and painful to many.  This is true whether or not the economic weakness attains status as an "official" recession.  It is a range of results, not a black or white question.

The Contest

There is persistent interest about the recession question.  It is a proven winner for pundit and media articles.  It is as if there was a contest going on.  Let us make it official.  How should we determine the winner?

There are some logical steps involved in winning a contest.  First, you need a definition of a recession.

Warren Buffett, esteemed by all and especially by us, says that this is a recession by any common sense definition.  Maybe so, but common sense is difficult to codify.

Some embrace the rule of thumb:  two quarters of negative GDP growth.  This is the definition at InTrade, where those living outside of the US can trade the prediction markets legally.  Since InTrade has to pay off to winners and losers, they need a specific rule with a timely resolution.  The punters have the odds at 70% or so.   Bespoke Investment Group and Greenback Consulting report these results.  We should note that the public has been wrong on this forecast and those selling short the 2007 InTrade recession contract collected.

The official definition comes from the National Bureau of Economic Research (NBER), the accepted recession-dating authority for decades.  Here are the NBER criteria, also known as the official rules for this contest by which contestants will be judged:

The committee places particular emphasis on two monthly measures of
activity across the entire economy: (1) personal income less transfer
payments, in real terms and (2) employment. In addition, we refer to
two indicators with coverage primarily of manufacturing and goods: (3)
industrial production and (4) the volume of sales of the manufacturing
and wholesale-retail sectors adjusted for price changes. We also look
at monthly estimates of real GDP such as those prepared by
Macroeconomic Advisers (see Although
these indicators are the most important measures considered by the NBER
in developing its business cycle chronology, there is no fixed rule
about which other measures contribute information to the process.

The NBER also notes the following:

A recession is a significant decline in economic activity spread across
the economy, lasting more than a few months, normally visible in real
GDP, real income, employment, industrial production, and
wholesale-retail sales. A recession begins just after the economy
reaches a peak of activity and ends as the economy reaches its trough.
Between trough and peak, the economy is in an expansion. Expansion is
the normal state of the economy; most recessions are brief and they
have been rare in recent decades.

Implications for a Winning Entry

Many contest entrants have not studied the rules:

  • The effects must be broad based, not emphasizing a specific sector;
  • The definition is monthly, not quarterly;
  • The official start of the recession will go back to the last peak of economic activity; and
  • The result is not known for months — maybe many months — after the recession has occurred.

The last point is especially noteworthy.  The study of economics involves the use of accurate data.  The official data get revised as more information becomes available.  This means that no one really knows the key factors for many months.  It is not that economists are stupid  or incompetent.  They are attempting to develop data that are useful in econometric models.  Recession dating is inevitably retrospective.

The dating procedure has important implications for those entering the contest.

  1. Those who started forecasting the recession too far in advance should be disqualified.  There has to be some statute of limitations.
  2. If the current period gets defined as a recession, those "calling it" at the time of the last peak will be the winners.  The official date will go back to that time — perhaps October or November.
  3. There could be a recession, as defined by the NBER, even if there is no single quarter of negative GDP growth.  Careful readers will observe that all criteria could be met without an actual decline in GDP.

Handicapping the Field

The Perma-Bears. Readers can submit their nominations, but quite a number of forecasters have been on the recession theme for more than a year.  They are disqualified, unless they specified a starting point.

October-November predictors.  These entrants might win, if the NBER conditions are met.  These are the pundits who have said for months that "we are already in a recession."  A better formulation of their comments might be that these conditions, if sustained for a long enough period, will eventually be judged as a recession by the NBER.

The Deniers.  There are several respected pundits who do not believe that current experience will constitute a recession.  These include Rich Karlgaard, Vince Farrell, Gary D. Smith, Dick Green, Mark Perry, and David Malpass.  These observers, all of whom we respect, note that current data are not actually at the levels of past recessions.  We note that the NBER might deem this a recession if the pullback from the peak is great enough, broad enough, and long enough.

The Probability Analysts.  Some of our most thoughtful and respected sources consider the data and make forecasts in a careful fashion.  These forecasts weigh probabilities, mostly the question of whether the NBER criteria will be met.  They ask the question of whether the current economic weakness will eventually prove to be long enough and broad enough to meet the definition.  This group includes two of our favorite sources, including the ECRI (recently calling the recession) and Econbrowser (with an ongoing evaluation).

The Winner?

Winning the recession forecasting contest is a bit like wining one’s NCAA March Madness pool.  The most thoughtful handicapping may lose to those taking an eccentric but winning position.

We expect the ultimate winner to be a pundit from two polar opposite groups:  one calling the start in October or November or one predicting that no recession will occur.

Our reason?  If this time period is ultimately deemed to be a recession, the dating will go back to the last peak.  Those are the rules.

Corrections?  We invite anyone whom we have missed to check in with an entry.  Readers, too.  Also, please let us know if we mis-represented anyone’s position.

Winners will be announced in a year or so, when the NBER analyzes all of the revised data!

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  • David Merkel April 2, 2008  

    When I was interviewed on Bloomberg Radio, I was asked whether we were in a recession, and I said the question is a backward looking one, and not relevant to making economic decisions. I then explained what was happening to the various sectors of our economy, and said that understanding that was a lot richer way to approach the economy than a single word, “recession.”
    I haven’t been invited back. The media often likes simple answers, and the reality is far more complex.
    This is a long-winded way of saying that I appreciated this article. Oh, and I won’t likely be submitting an entry. 🙂

  • Lord April 2, 2008  

    What do you see leading us out of this slowdown?

  • Roger April 3, 2008  

    I believe it is Bartiromo and not as you wrote it. I could be wrong.
    [Thanks! and also to Bill for catching another typo-JM]

  • Bill aka NO DooDahs! April 3, 2008  

    There’s a simple way to win MULTIPLE “recession-predicting contests” over a period of many years: always predict “no recession.”
    Guarantee that over the long term, that play will win.
    It’s just the way the math works …

  • RB April 3, 2008  

    There is also the mechanical expert, i.e. Wright Model B — if this is not a recession, and this model does not predict one convincingly this time, it could be a case of the worst soft landing(scroll down to bottom)

  • blackvegetable April 3, 2008  

    I find reference to Karlgaard and Malpass ironic in this context. The former is resident at FORBES, the girth of whose issues tend to be more accurate barometers of prevailing economic conditions than any of the editorial comment found therein….The magazine has been quite skinny for some time now. Malpass was, until its recent unfortunate disintegration, the economic guru of Bear Stearns, and he has a consistently awful record with respect to analysis of existing economic conditions going back at least 2 years.
    Old Prof is a very thoughtful and polite correspondent, and nominally, a dispassionate analyst – but I have long sensed a bit of a bias towards “explaining away” the shortcomings of the Bush era economy. If one accepts the arguments of the critics, specifically with respect to nominal job generation, real wage growth and declining savings, then what appears to many observers as the “current crisis” makes considerable sense. The foreclosure epidemic is too widespread to be dismissed as a shake-out of speculators, it is more reasonably explained by a broad contraction of spending capacity on the part of a vast swath of the population. The effect of rapidly escalating energy costs, as well as the rising prices of food staples, can’t be ignored any longer. When people start defaulting on car loans, credit cards and even utility bills, not even Malpass will be able to deny that we are in a severe recession, verging on a depression.
    Btw, put me down for an Oct. 07 start date….

  • Jeff Miller April 3, 2008  

    BlackV – Thanks for your comment. I always look forward to your observations.
    The Forbes group represents a viewpoint. You might note that Steve Forbes wants to completely suspend the FAS 157 marking to market — much more extreme than the SEC position that most free marketeers find abominable. We must beware of pigeonholes.
    My approach was simply to name known entrants without any other qualification. Your position (a good choice) is on record.
    As to my own politics, I carefully avoid intermingling politics with market interpretation. I also do objective analysis on, our sister site. I have a viewpoint, but it is not part of my work. Meanwhile, you might do a little research on the general view of grad students in the early 70’s and also poli sci professors of that era.
    I do believe that the Bush Administration has suffered from a facile analysis that compares the recovery from 2000 with others, as if the starting point were the same. Another future topic, although I think I have mentioned it a few times.
    Finally, I strongly disagree about Malpass. Since I have carefully read his weekly commentary for years, I have an advantage. I also have the background to analyze and poke holes. I know that he has been the subject of a recent vendetta.
    I suggest the following. Go back and read the article that gave you this impression. Follow the links to see what was really said, and whether the conclusion was supported. If you are still in doubt, call or email and I’ll be happy to discuss it with a valued reader. I don’t feel like writing on this topic right now, although a search on the blog will show various parts of the debate.
    Malpass held a conference call yesterday, with the usual collection of insightful data not seen from other sources. In particular, he responded to various challenges, including car loans. I do not feel free to post the graphs of his research, but some of it will come out in public.
    Thanks again for a stimulating comment. We shall all see how the recession story plays out. The stock market has already voted.

  • Lord April 4, 2008  

    It occurred to me that the lag between recession onset and talk of one is so long, the idea talking about one can lead to one is quite backwards.

  • Bill aka NO DooDahs! April 4, 2008  

    The onset is backdated to the last peak of economic activity; therefore, if we are “booming” on October 1 just before I start the ball rolling with “talking us into a recession,” and I’m successful, the recession will be said to have started on October 1, even though the process of talking us into one took place after the recession “officially” started.
    It’s yet another reason why the definition of a recession is worse than useless. I actually posted about useless definitions a month or so ago:

  • RB April 4, 2008  

    That recession can be brought upon by our own will has been certified by none other than the venerable Greenspan:
    “Throughout his career as Fed chairman, Greenspan has relentlessly propagated the view that the business cycle is a mysterious phenomenon, the result of imponderable forces operating deep within the market economy and inaccessible to human reason. ”

  • blackvegetable April 5, 2008  

    I would be pleased to offer the evidence which informs my complaints about Malpass, but I can’t find an e-mail addie for you….

  • Mike April 6, 2008  

    “It did not matter whether the respondent had any forecasting credentials.”
    They have credentials for that?
    This gets forgotten over time, but the Inverted Yield Curve Theory was the most accurate predictor of this recession when the yield curve inverted back in July, 2006.

  • egghat April 11, 2008  

    Well I did a bet on September, 4th that the US will have 2 quarters of negative growth from Q3/07 to Q2/08. The consensus then was above 2.5% growth, so this bet was kind of a “stunt”.
    House prices had risen extremly and then topped, the US had an inverse yield curve (the single best indicator) for months and the financial crisis began boiling … Clear signals for me.
    I’m still surprised that the inverted yield curve didn’t ring the alarm bell for more economy watchers. An inverted yield curve plus some big problem (think: S&L, LTCM, internet bubble, housing collapse, etc.) will (nearly) always lead to a recession.
    But I haven’t won this bet (yet).