Recession Expectations: An Important Anomaly

Where does one look for economic forecasting?  At "A Dash" we take the role of the educated consumer of forecasts.  We like to find the best information from the most reliable sources.

During the last week we learned the recession expectations of distinctly different groups.


The Blue Chip Economic Indicators panel reduced the consensus forecast for U.S. economic growth for 2007 from 2.5% (last month) to 2.3%.  The 2008 forecast dropped 0.1% to a prediction of 2.9%.  These results do not provide for the analysis of individual forecasts without a subscription.

Our take:  The forecast is consistent with the planned Fed slowing of the economy to address inflationary expectations.  It is what should be expected if we are accomplishing what some call a "soft landing" and we call the Glide Path — a better term when one expects to keep flying!

The Wall Street Journal poll of economists forecasts GDP growth for the first two quarters of 2007 to be 2.2% and the remainder of the year to be 2.9%.  62% of those polled expressed confidence that the result would be within 0.5% of their estimate.

Consistent with this confidence level was the statement that the chance of a recession in the next twelve months was only 26%.  Keeping in mind that recessions occur with some regularity, one needs to understand that "normal" expectations are about a 20% chance.  Something can always go wrong.

The economists were asked what might upset their predictions.  20 of 54 respondents said slower CapEx spending and only 11 cited the housing market.

Our take:  Once again, the overall results are consistent with the Fed’s expectation for growth that is slightly below the long-term trend expectation of about 3%.  There is not much worry about recession, and the forecasters are pretty confident of their views.

Regarding the biggest worry, one must realize that the question asked them to name something!  The respondents did not attach a probability to CapEx or Housing.  They merely answered that this was what to watch.

Despite this rather obvious inference one would get from actually looking at the questions and answers, the headline of the story in the WSJ was:

Economy Enemy No.1:
Soft Capital Spending

An alternative might have been:  Economists see recession as unlikely.  What to watch?  CapEx.  A notable feature of this poll is that the highly trumpeted housing factor is the big threat for fewer than 20% of respondents.

Prominent bloggers like Barry Ritholtz at The Big Picture also highlighted the CapEx concern.

Read it here first: Slow CapEx Spending Worries Economists

This emphasis on a "forced response" does not capture the overall sense of the survey.

The People

The Bloomberg/LA Times poll asks the people what they think about economic prospects.  The Bloomberg Story had this headline:

Most Americans See Recession in the Next 12 Months

Their survey showed that 60% of respondents expected a recession, and they compared this to 64% who had similar expectations in December of 2000, "three months before the last decline."

This seems to imply some prescience on the part of the average American to anticipate recessions.  Buried in the article is another interesting result.

Sixty-four percent of those polled said their own finances
are very or fairly secure compared with 35 percent who described
them as shaky.         

“People tend to be pretty optimistic about their own
situation, but when it comes to the larger economy they’re much
more pessimistic,” said Karlyn Bowman, a polling expert at the
American Enterprise Institute in Washington. “The public’s just
in a very sour mood because Iraq continues to cast a pall over


Our take:  The public perception is not surprising given the media spin on the economy.  It is not that economic reporters are intentionally biased; potential problems are more newsworthy than bland forecasts.

We are also reminded of the ongoing poll results about how people feel about Congress (always scoring high negatives as an institution) and their own House Member (usually scoring positives).  It is an interesting irony which does not lend itself to a solution in the voting booth.


At "A Dash" we have stressed the importance of finding the real experts on any topic.  Does the average citizen have a better sense of the probability of recession than a panel of economists?

There is a general sense on Wall Street and in the blogosphere that since economists did not forecast the last recession their opinions are no good.  It is a wonderful, democratizing conclusion, allowing each pundit or writer or citizen to feel they are just as good as those who trained to do this, and spend their professional lives on the problem.

We disagree.  This is not American Idol.

This is an important theme, especially with the election season starting, so we plan to pursue it further.  Meanwhile, readers with a serious interest in recession chances could pursue our past posts on this topic.

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  • F. April 15, 2007  

    This is a great post. I guess as long as the Fed continues to lower the gross market interest rate by running their repo scheme they can almost guarantee capex spending won’t tail off too bad.

  • Barry Ritholtz April 16, 2007  

    Before you blame the media, note they have been trumpeting new stock market highs, unemployment at record lows, global stock market boom, and inflation is contained — so I doubt its that.
    “How are we doing? Great! We haven’t spent our home equity on consumer goods, we are not in debt, and our income has kept up with inflation. But we expect a recession, anyway. Yeah, that’s the ticket!”
    What’s wrong with that picture?

  • REW April 16, 2007  

    The public is correct to discount the professional economists, but that doesn’t mean that a poll of grandmas at the mall is a better predictor of recessions.
    The big professional challenge for economists is the shift away from treating economics as a behavior science (i.e., a social science) and towards treating it as a hard, mathematical science. It seems like new economists today are just kids with a supercomputer who have no idea how market participants will react to (or anticipate) changes in the economic environment.

  • Duncan April 16, 2007  

    Business Week has a brief article on how weak capex domestically provides a misleading picture on how much US companies are really spending:

  • RB April 16, 2007  

    Mauboussin on the limitations of experts in solving problems of only intermediate complexity, and the wisdom of crowds when conditions such as diversity, aggregation and incentives are met

  • RB April 16, 2007  

    “Re”posting above link:

  • Jeff April 18, 2007  

    Thanks to everyone for their comments and great points on this topic.
    I had the Mauboussin piece in mind when writing it. It deserves a separate and more extensive treatment — as does most of his work — so it is on my (ever-growing) list.