Colorado economist Tucker Hart Adams last week said there’s roughly a 50 percent chance of a national recession next year.
I predict she will be proved right: There either will be or won’t be a recession next year.
They don’t call Adams the Duchess of Doom for nothing. By laying 50 percent odds, Adams has signaled that she is more pessimistic about the risks of a recession than most other economists.
Richard Wobbekind, director of the business research division of the Leeds School of Business at the University of Colorado at Boulder, gives 30 percent odds for a recession in 2006.
Sung Won Sohn, a noted economist and chief executive of Hanmi Financial Corp. in Los Angeles, puts the chance at 25 percent.
Vectra Bank Colorado economist Jeff Thredgold puts the possibility at only 15 percent.
If we don’t have a recession, Adams predicts the economy will grow 3 percent in 2006. Still, she said she fears that consumers – who drive two-thirds of the economy – may be tapped out.
They’ve cashed out their home equity, maxed out their credit cards and now face rising fuel prices and interest rates. Sounds like an accurate description to me. But in the world of economics, it can take years to be proved right.
Federal Reserve Chairman Alan Greenspan made his famous “irrational exuberance” comment about the stock market in 1996. The market didn’t turn south until 2000. Had anyone taken Greenspan’s comments to heart, they’d have missed out on more than three years of booming returns.
Greenspan, a supreme rationalist, also changes his mind as new facts become available. About a year ago, he said the bubble in the nation’s housing market would be manageable. Lately, however, he’s been sounding the housing-bubble alarm.
Perhaps, given Greenspan’s record on predictions, we still have another two to four years before the housing bubble pops. But rest assured this bubble will pop eventually, and we’ll look back and say Greenspan was right.
It’s easy to spot a bubble. Predicting when it will pop is another matter.
Our nation’s last recession was really the work of an imploding stock market. Stock prices ran up, and when the market crashed, businesses began closing doors. Who could have predicted this?
“It was really driven by psychology,” a factor that “is not effectively modeled,” said Wobbekind.
Economists didn’t “predict” the last recession until long after it happened. The National Bureau of Economic Research, the official arbiter of recessions, declared two months after 9/11 that the recession had begun in March 2001.
The Cambridge, Mass.-based think tank later declared that the recession ended in November of that year. The millions who lost their jobs in 2002 and 2003 resoundingly disagreed. And the economy didn’t deliver decent job growth until about 2004.
Economists routinely fail to predict recessions. Worse, they can’t even agree if past recessions even happened. There’s an ongoing dispute about whether there was actually a recession in 2001.
The classic definition of a recession is two consecutive quarters of decline in the gross domestic product. But GDP numbers are continually revised.
The Commerce Department’s Bureau of Economic Analysis now says there were two quarters of declining GDP in 2001, but they were not consecutive.
NBER, however, doesn’t adhere to the classic definition of a recession, preferring a more sophisticated model that quantifies diminishing economic activity. NBER still maintains there was a recession, two consecutive quarters or not.
Economic predictions provide a framework for fluctuating economic data. They help us think about what’s going on in the world. And they make great headlines. But when you read them, don’t be tempted to believe that the sky is falling.
“We don’t forecast the future because we know what’s going to happen,” said Thredgold. “We do it because we’re asked to.”
Al Lewis’ column appears Sunday, Tuesday and Friday. Respond to Lewis at , 303-820-1967, or alewis@denverpost.com.
