Economists historically have had a terrible record of accomplishment in predicting recessions. This could be due in large part to the conflicting signals that oftentimes accompany an economic peak. For this reason alone, we should be circumspect about a 2020 recession. Lately, the profession has become more pessimistic.
According to a recent National Association of Business Economists (NABE) survey, two-thirds of economists queried expect the onset of recession by the end of 2020. The cause? The most prevalent downside risk cited was international trade, where 41 percent of forecasters worried that the U.S.-China bilateral retaliation could cause a recession.
What is second? It is the actions taken by the Federal Reserve, but, here, it only accounted for 18 percent of the worries. There are many other possible downside scenarios, such as a hard landing in China, but NABE did not highlight them. So is the economists’ consensus right?
The Treasury yield curve is telling us yes because it is on track to invert within the next quarter or two, and after that happens, a 2020 recession is a real possibility. After all, the yield curve has a relatively unblemished track record forecasting recessions. The yield curve may soon be on the same side as the consensus of economists.
However, there are a couple of other factors for investors to consider. For starters, recessions typically do not occur when nearly everyone expects them. This is largely due to psychology. Business cycles often end after periods of excessive optimism created during an expansion.
If, however, individuals and businesses are more cautious in their investing and spending plans, it is likelier the economic cycle lasts longer.
The fact that cumulative real GDP growth on a per capita basis has massively lagged previous business cycles tells us that households and firms have not been overly optimistic in their economic and financial decision-making. If they were, we would have experienced faster growth over this expansion.
Then there is the aforementioned ability of economists to predict economic turning points. It is not very good. This is evident from the Anxious Index, a series created by the Philadelphia Fed that measures economists’ probability of a contraction in real GDP in the ensuing quarter. Collectively, economists simply do not know when the economy is going to shrink.
In the last business cycle, only 17 percent of economists were “anxious” about negative GDP in the fourth quarter of 2007, which happened to mark the peak in the economy. The recession began in the first quarter of 2008.
Then, in the third quarter of 2008, when Lehman Brothers went bankrupt, only 47 percent of economists thought growth would be negative the next quarter. That was not a very prescient call considering the fact that growth fell at a stunning 8-percent annualized rate. This actually leads to our final point.
If consensus of economists does not know with much certainly if the economy is going to decline in the next quarter, how can they possibly know what is going to happen two years from now. They cannot.
Joseph LaVorgna is the chief economist for the Americas at Natixis, an international corporate and investment banking, asset management, insurance and financial services arm of Groupe BPCE, the second-largest banking group in France with 31.2 million clients spread over two retail banking networks, Banque Populaire and Caisse d’Epargne.