This is the sort of post Dean Baker often writes, “New York Times features economists who missed the housing downturn,” although this time, the subject is the outlook for 2009.
Now in fairness, the author, Louis Uchitelle, puts in far more caveats than one normally sees in this sort of piece. In fact, it could be read as being coded; “Yes, all the usual suspects say the economy will bottom out in July, but the factors that made them wrong in calling the severity of the downturn may well apply yet again.” Indeed, Uchitelle, himself an economist, gives a short-form discussion of why their models might not work well in times like these and uses turns of phrase that signal considerable caution, such as “for this rosy picture to play out….if the dominoes fall the right way”.
But if you read the piece superficially (as I assume most readers do) the piece says clearly that the majority of professional forecasters expect recovery to begin in the second half of the year. They also see unemployment peaking at 8 or 9% (the investor crowd I chat with, which BTW is cautiously long stocks, sees unemployment peaking markedly higher, in the 10-12% range).
While the article does quote Nouriel Roubini at some length (and Roubint sees the downturn lasting through all of 2009 and only a very anemic recovery in 2010), it comes off as an outlier. Indeed, the lack of corroborating views undermines what Roubini has to say.
I wonder why Uchitelle and others don’t fess up to what may be the dirty little secret of forecasting: at least according to Mark Thoma, who teaches macroeconomics, the models are good at projecting conditions over the next six months, and are pretty unreliable beyond that point.
Uchitelle does go to some length to give other reasons why the pros performed so badly last year:
But Mr. Roubini is not among the economists surveyed by Blue Chip Economic Indicators. These professional forecasters are typically employed by investment banks, trade associations and big corporations.
They base their forecasts on computer models that tend to see the American economy as basically sound, even in the worst of times. That makes these forecasters generally a more optimistic lot than the likes of Mr. Roubini.
Their credibility suffered for it last year. They did not see a recession until late summer. One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending.
Those models also take as a given that the natural state of a market economy like America’s is a high level of economic activity, and that it will rebound almost reflexively to that high level from a recession.
But that assumes that banks and other lenders are not holding back on loans, as they are today, depriving the nation of the credit necessary for a vigorous economy.
“Most of our models are structured in a way that the economy is self-righting,” said Nigel Gault, chief domestic economist for IHS Global Insight, a consulting and forecasting firm in Lexington, Mass.
Uchitelle is smart and fair-minded. I suspect he felt he had to report on what mainstream forecasters were coming up with, almost as a matter of convention and consistency (the Times as newspaper of record). He tells us that they work for big financial firms and corporations, which means they have a bullish bias (downbeat scenarios would not be good for sales).
So the article is a piece of deconstruction, and you can find confirmation for either the optimistic or pessimist case in the article. But while Uchitelle did go to some length to offer suitable caveats about the professional forecasters, the piece nevertheless presented them as the establishment, with presumably the weight of authority behind them.
And there may be other reasons for Uchitelle’s manner of presentation. An investor met socially with a good-sized group of investors and economists last summer. He was struck by how what they said privately was far more downbeat than what they were serving up for public consumption. Thus there may be other economists who harbor considerable reservations in private, but are not willing to stick their necks out, both to avoid being part of the problem (feeding investor and consumer worries) and knowing full well that any forecast now is dubious, given the considerable uncertainty over the nature and scope of government action here and overseas.
Welcome to the TinkerBell economy. If we all believe and clap hard enough, the hope is that it will pull through.
But the Times itself, in another article today, “Desperate Retailers Try Frantic Discounts and Giveaways,” gives plenty of reason to question the upbeat forecast:
An era of desperation marketing is at hand, with stores and automobile dealerships adopting virtually any tactic that might grab the attention of frightened consumers.
After one of the worst holiday seasons in decades, businesses are doing whatever they can to clear their shelves and make way for spring merchandise. Sales of 50 percent off stopped capturing the attention of customers weeks ago, so stores are layering discounts on top of discounts, and trying to lure shoppers with promises of giveaways, bulk bargains and other gimmicks.
“Retailers are trying everything in the book,” said C. Britt Beemer, chairman of America’s Research Group, a consumer research firm. “You’re seeing things like, ‘Buy one, get two free.’ That’s just unheard of, and the item you’re buying isn’t even full price.
The second article neglects to mention that discounts this severe may condition consumers to expect them (or at least far deeper than previous norms). That in turn would lead them to hold off from buying till end-of-season, If that happens, deflationary behavior (postponing spending out of the expectation that prices will fall) may take hold, not via waiting for reduction in nominal prices, but for very deep discounts.