Now Loungani, with a colleague, Hites Ahir, has returned to the topic in the wake of the economic crisis. The record of failure remains impressive. There were 77 countries under consideration, and 49 of them were in recession in 2009. Economists – as reflected in the averages published in a report called Consensus Forecasts – had not called a single one of these recessions by April 2008.
This is extraordinary. Bear in mind that this is not the famous complaint from the Queen that nobody saw the financial crisis coming. The crisis was firmly established when these forecasts were made. The Financial Times had been writing exhaustively about the “credit crunch” since the previous summer. Northern Rock had been nationalised in the UK and Bear Stearns had collapsed in the US. It did not take a genius to see that trouble was on the way for the wider economy.
Below is an article I posted back in December 2007. I had just been studying the method David Rosenberg used in his forecast. What I was reading showed that his method was a better one. Still, it was hard to believe a probability of 100% (of a recession) at the time. Also, back in 2007 I was mostly focused on military matters. I sort of stumbled into the coming financial black swan. Some of my newsletters were talking about a coming disaster, but it was hard to grasp the full meaning at the time. However, I did understand that something big was coming.
100% Probability of U.S. Recession in 2008? | 1913 Intel
We know only two things in life are certain: death and taxes.
Now, along comes Merrill Lynch economist David Rosenberg with the declaration that there is a 100% chance of a recession in 2008.
One hundred percent, as in it’s going to happen beyond the shadow of a doubt.
In a report released Wednesday, Rosenberg referred to a recently unveiled a recession probability indicator that uses the shape of the yield curve (10-year note/3-month LIBOR) and corporate spreads (Baa) to predict the probability of a recession over the next 12 months.
Hmmm. In any case, after crunching some relevant numbers, the model is predicting a 100% likelihood of a recession.
But wait. According to the same report, another model for gauging the probability of a recession, one that uses the shape of the yield curve and the level of the Fed funds rate, is showing a 50% chance of a recession.
Confusing? You bet.