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On Wednesday, the National Association for Business Economists, or NABE, released the results of its latest survey of professional economists. The economists now predict our recession will end in the second half of this year, when GDP growth will clock in at 1.2%. That's still skimpy, but it's night-and-day compared to our current mess.
"Recession End In Sight, Economists Say," declared CBS.
"Economists: Recession to End in 2009," says CNN.
We're saved! Yippee!
Good news, right? Sure. Between the looming death of General Motors (NYSE: GM ) and the capital brouhaha of Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) , any positive report by a group of well-educated and fancy-titled economists is bound to be clung to. People are tired. They're broke. They're scared. They want good news.
Unfortunately, what you won't find in NABE's forecasts is the only thing that really matters: the accuracy of its past predictions. Anyone can throw out forecasts. What matters is whether those forecasts are even remotely correct.
And from this point of view, NABE's record is pretty bleak. Over the past year and half, nearly every macroeconomic prediction it's made has been not only off track, but drastically so. With the awesome power of hindsight, here are some recent NABE predictions compared to what really happened.
- NABE Prediction: "This is a very shallow downturn. In fact, only slightly more than half of our [NABE] members believe it will ultimately be declared a recession. And, of those, the majority believes it will be over either this quarter or the next [one]."
Reality: The economy was already six months into a recession -- by some measures, what would become the worst one in 70 years.
- NABE Prediction: (from Bloomberg) "The worst of the U.S. credit crunch and housing slump is about over, and growth will pick up to 2.1 percent in the second half, according to the poll of 52 [NABE] professional forecasters ... More than 60 percent of the economists surveyed predicted that businesses and consumers will find it easier to borrow in the final six months of the year."
Reality: The real credit crunch hadn't even started. By the end of 2008, it was nearly impossible for anyone to borrow.
- NABE Prediction: (per the survey committee chair) "We are most of the way through the downturn, or the worst of it. Recovery forces are in place and conditions should improve over the next year and a half."
Reality: The worst part of the downturn hadn't even begun. The biggest "recovery forces," massive liquidity measures and bailouts, weren't even dreamed of yet.
- NABE Prediction: "Following a small contraction in the third quarter of this year, the NABE forecasters expect real GDP to decline at a 2.6% rate in the fourth quarter."
Reality: Real GDP contracted at 6.3% -- almost two-and-a-half times more than NABE's forecast.
- NABE Prediction: "The unemployment rate is expected to rise to 7.5% by the end of ."
Reality: Six months later, unemployment is already 8.9%. Seemingly resilient companies like Microsoft (Nasdaq: MSFT ) , Pfizer (NYSE: PFE ) , and Google (NYSE: GOOG ) are cutting workers.
- NABE Prediction: "The [budget deficit] is now expected to hit $765 billion during fiscal year 2009."
Reality: According to the Congressional Budget Office, 2009 will produce a $1.7 trillion deficit.
- NABE Prediction: (from Market News International) "The consensus of macroeconomic forecasts made by a panel of 49 professional forecasters [NABE], projects the yield on 10-year Treasury notes to end 2008 at 4.10%."
Reality: 10-year Treasuries ended 2008 at just over 2% -- the lowest yield ever.
- NABE Prediction: "The 2009 outlook, shown for the first time, calls for real GDP to grow 2.9% over the course of the year."
Reality: Real GDP fell 6.1% in Q1 2009, making the possibility of annualized 2.9% growth a miracle on steroids, laced with caffeine.
Fair is fair
Now, I know what you're thinking: "NABE's predictions were thrown off course because of Wall Street's sudden meltdown -- something that no one could have seen coming."
True. But that's the point I'm trying to make. The forces that shape macroeconomic movements are almost exclusively unpredictable. Economies are an incredibly complex web of human psychology, consumer confidence, political squabbles, accounting rules, the flow of information, the supply of natural resources, and countless other factors. No matter how many Ivy League degrees one possesses, the amalgamation of these factors isn't something that can be predicted with precision. And since economists' work doesn't produce anything tangible, it's far too easy for us to ignore their track record. If they were doctors, engineers, or pilots, their abysmal track record would leave most of them either dead or in jail.
Now, there are indeed signs that the economic free-fall is abating. But that hardly means anyone knows precisely when the recession will end. As NABE's predictions show, there were "green shoots" of hope in May 2008 as well. But those signs of hope were almost immediately buried. Such hindsight observations should remind you how imperfect economic forecasting is, and convince you to take any confident forecast with a grain of salt.
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