It’s no fluke that the experts got it wrong in 2023, almost unanimously forecasting recession for what turned out to be an economic boom year.
The people in the know are often mistaken, sometimes spectacularly. By one measure, between 1992 and 2014, economists failed to identify 148 out of 153 recessions worldwide. They aren’t much better at predicting growth years, either.
Why so wrong? Sometimes, stuff just happens. Wars, pandemics, natural disasters—hard-to-predict events that shatter preconceived notions, often rendering previous predictions moot. Recall the world before and after Sept. 11, 2001.
Other times economists get it wrong for all the right reasons, as in 2023.
“Forecasters had adequate reason to expect a hard landing, given Fed tightening and the past record that suggested that pulling off a soft landing is difficult,” the Johns Hopkins economist Prakash Loungani told Barron’s.
The problem is a lack of similar periods on which to base an analysis, Loungani said, since relevant data only stretches back a matter of decades. That the economists failed to envision a soft landing wasn’t, he says, “a grievous fault, in this instance.”
Other misses have been more grievous.
It was the failure to spot the danger signs in 1929 that made the October crash that year so maddening. The Roaring ‘20s stock market had just experienced its hottest year yet in 1928, returning 48.22%, and more of the same was expected in the new year.
“[T]he prevailing tone in the forecasts of bankers, business leaders and statesmen is one of optimism and confidence,” Barron’s wrote on Jan. 7, 1929, adding that “the general business situation is basically sound.”
Yet the same article noted a record increase in the amount of brokers’ loans on account, a sign of dangerous overleveraging. That warning was ignored.
As late as Oct. 15, nine days before the Crash, the economist Irving Fisher uttered the statement that will always stain his otherwise sterling reputation, announcing that stock prices had reached “what looks like a permanently high plateau.”
Instead, the market plummeted almost 90% in three years, to 41.22 from 381.14, and heading into 1954 it still hadn’t regained its 1929 high. And it wouldn’t, the experts predicted.
“Economists of the country,” H.J. Nelson wrote in Barron’s Trader column on Jan. 4, 1954, “showed striking unanimity, when polled, in predicting that 1954 would see a decline of at least 5% in Gross National Product and that the outlook was for genuine ‘recession.’”
A mild recession had started in late 1953, but by mid-1954 the economy was rolling, as was the stock market. The pessimists weren’t sold, however.
“Traders were astonished with what they termed a phenomenal turnabout,” reported The Wall Street Journal’s Abreast of the Market column on June 21, 1954, as the market kept defying expectations of “another tumble.”
Though not apparent at the time, this was the beginning of the golden 1950s era that lives in the collective American memory—“I Love Lucy” was the No. 1 TV show, Elvis Presley released his first single, and baseball star Joe DiMaggio married an aspiring actress called Marilyn Monroe.
It was also the beginning of a stock market boom sparked by the return of the “little guy,” the retail investor who had been frightened away by the crash 25 years earlier. And, as the Abreast of the Market author notes, new market strategies were being implemented.
“Investors,” wrote the columnist, “are taking a broader hand in the lower-priced issues which have a good management and dividend record, whose status seems to indicate they are doing and going to do better in the months ahead.”
We’d call that value investing. Trading volume increased as the market climbed, and the
Dow
returned 43.96% that year—an annual performance unmatched since. And, on Nov. 23, 1954, the index reached 382.74, finally topping the pre-Depression high set on Sept. 3, 1929.
Forecasting has become more of a science in recent decades, but it still gets it wrong, a lot. It was Loungani, the Johns Hopkins economist, and his co-authors of the IMF working paper, “How Well Do Economists Forecast Recessions?,” who discovered how economists missed all those downturns.
“I like the fact that economists were willing to predict recession” in 2023, Loungani said, since “the typical mistake has been the opposite, to not call recessions that happen.”
And not calling a recession can be disastrous. Think of 1929. Or think of an approaching storm.
“It’s like with those hurricane paths, there’s a median path, but you have to draw a big zone around it,” he said.
That brings us to 2024. According to Bloomberg’s survey of more than 650 forecasts, the consensus is for “a middle-of-the-road scenario,” with high interest rates causing a benign economic slowdown, followed by rate cuts and a late-year rebound. Some, like Fidelity, predict recession; others, including
Axa,
think it can be avoided.
So how should an investor interpret it all? Maybe the best take on forecasting was offered 40 years ago by Peter L. Bernstein and Theodore H. Silbert in an influential article in the Harvard Business Review, “Are Economic Forecasters Worth Listening To?”
“We argue that economic forecasts deserve to be taken seriously, not necessarily because they promise to be accurate,” they wrote, “but because they are so much more useful than having no forecasts at all.”
They may not be right, but they’re better than nothing. High praise indeed!
Write to [email protected]
Read the full article here