On forecasting recession

Richard Murphy says there is a "near inevitability" of a recession sometime soon. I'm not sure it's wise to make such a prediction.

I wholly agree with him - and with the IMF - that there are reasons to be worried. In fact, I'd add a couple to Richard's menu:

- The US breakeven inflation rate, at 1.2pp, is close to a six-year low. It implies that markets expect the Fed to undershoot its inflation target - which means bond markets think monetary policy will be too tight.

- At low inflation, the yield curve might no longer be the great predictor of recessions it has been in the past. The fact that the yield curve is upward sloping is therefore not as good a comfort as it once was.

However, recessions are damned hard to foresee. Most professional forecasters - even before 2008 - have failed to see them coming. This might be because they are inherently unpredictable because they arise in part from failures of individual companies which might be magnified by network (pdf) effects. Because we don't know enough about these complex processes, time-dated forecasts are, as David says, "a mug's game."

Yes, a recession is possible. But there's a good reason to be wary of forecasting one now. Share prices tend to do much better from Halloween to May Day than in the other six months of the year. This suggests that people's assessments of economic prospects usually become too gloomy at this time of year. We should, therefore, be especially sceptical of pessimism now.

Of course, if he keeps forecasting a recession, Richard is certain to be right eventually. As Andy Haldane said last month:

Recessions occur roughly every 3 to 10 years. Over the course of a decade, they are overwhelmingly more likely than not.

But this is like a clock that's right twice a day: it isn't good enough for practical purposes.

My big problem with Richard's forecast, though, isn't that it might be wrong: it might not be. Instead, I've two other beefs.

One is that forecasting a recession gives the many non-economists who read Richard a false impression that economists can foresee the future. In fact, we can't. Knowledge of the future is a contradiction in terms.

Secondly, I'm not sure Richard has got the cost-benefit calculus right.

His main ideas - some of which such as opposition to austerity in its current form, a state investment bank and the possible need for alternative monetary policies are good - don't derive their strength from the claim that we're heading for recession. Merely warning of the possibility of recession is good enough. However, if we don't get a recession, his credibility will be called into question to discredit these ideas - whilst if we do get a recession his call will be forgotten or dismissed (rightly) as a lucky guess. He's therefore giving his opponents a stick to beat him with, and unnecessarily so. 

Comments

[Bob]

The problem is everyone is trying to export their way out of this mess. When/If China floats the momentum will tilt towards global deflation.

[Peter K.]

During the postwar era, in the U.S. context, a recession was brought on when the Fed raised rates to fight inflation.

Lately however, in the last few decades, we've reverted to the prewar era type of recessions which are brought on by bubbles popping and financial crises.

Bernanke and others say the 2008 crisis began when BNP Paribus closed two funds in August 2007 because it couldn't price the MBSs tied to the subprime market.

Just keep an eye out for something like that.

[Luis Enrique]

well I am praying for (not forecasting) a fall in house prices, and if this guy's research is anything to go by, that is likely to be accompanied by a recession:

https://sites.google.com/site/moritzschularick/

[Donald]

I suspect you're only seeing one side of the credibility risk. If we do get a recession his credibility will go through the roof. So it's probably a good gamble as he doesn't have too much credibility now and there's more upside than downside.

[Theophrastus]

"One is that forecasting a recession gives the many non-economists who read Richard a false impression that economists can foresee the future."

Perhaps those non-economists need to be reminded that Richard Murphy is not an economist, but a retired accountant.

[Blissex]

«a fall in house prices, [ ... ] likely to be accompanied by a recession:»

A fall in house prices is politically "impossible": it means losing elections for the next 15 years, it means having to bailout the whole overt and shadow banking system, it means the end of the regime of ever bigger better leverage.

Just a temporary dip like in 2008 was catastrophic for both Labour and the City.

Therefore there will be a lasting fall in house prices only when that is the least bad option. That is when a cataclysm happens, not a mere catastrophe or just a recession.

The effect will be something like the South East becoming like the North East, because the property speculation industry is to the South East what steel and shipbuilding was to the North East.

Which I think is the tory plan, because their plan is transparently for London as a a bigger Dubai, and the rest of the country as a reserve for grouse and cheap labour. It is nostaglia for the 50s, the 1750s though.

[Deviation From The Mean]

"Which I think is the tory plan, because their plan is transparently for London as a a bigger Dubai, and the rest of the country as a reserve for grouse and cheap labour. It is nostaglia for the 50s, the 1750s though."

That is the best explanation I have see for Tory policies!

To quote Jeremy Hunt we will work harder..like the Chinese, but we will have private banks...not like the Chinese!

On the impossibility of forecasting the future, why have I spent many an hour building finance systems that attempt to do exactly this?

[Ironman]

"Of course, if he keeps forecasting a recession..."

If? The one prediction I can make with absolutely certainty of being correct is Richard Murphy will yet again predicting a recession preceeded by stock market collapse of unprecedented magnitude.

[Richard Gadsden]

Isn't there a joke that some forecaster predicted nine of the last five recessions?

[Schofield]

"House prices can't fall in the UK."

Think Japan:-

http://www.businessinsider.com/the-psychology-of-deflation-2010-9

[Bill Posters]

Richard Murphy's credibility will be under attack whether he predicts a recession or not.

The point is the current probability of a recession is high, but there is no sensible government action on the horizon.

Average US GPD growth H1 is less than 2.5%. This is stall speed a good chance of a US recession 2016 Q1 and Q2. The Eurozone is even worse than stall speed the only hope there is to let all 20m Syrians in and build 'em all houses. Brazil, Canada and Russia are in recession, poor policy in Australia.

I work on high ladders. Sometimes you can see the weather coming from up there. You can press on, get finished, pack up the van go before it rains.

Sometimes the economy is also like that and you can see the bad stuff coming no need for a forecast.

[John Jones]

However, recessions are damned hard to foresee.

For professional economists maybe! But I saw the 2008 crash coming as did many others. It looked and felt so much like the Lawson boom of the late 80's that I felt that the pattern would be just a repeat.

But the message from those who supposedly knew more was this time everything was different and the economy was under control! "What can possibly go wrong?"

The same question was asked about the euro! So if Mr and Mrs Average can spot the looming dangers, maybe there is something wrong with the textbooks that are used in Universities these days?

PS This non expert says we are on the brink of the next recession!