The Recession Predictions Keep Coming: An Update

Predicting recessions is difficult bordering on impossible, but one prediction you can count on is that there will always be a surplus of newly minted warnings that a new downturn is near. Periodically I review recent examples (here’s last year’s update and its predecessor in 2016) and it’s time for a fresh look at how analysts continually convince themselves that the risk of economic contraction appears to be threatening.

In contrast with previous rounds of recession forecasting the predictions of late seem to be factoring in the recent strength in economic growth, which is obviously a challenge if you’re trying to rationalize that the macro trend is due for a fall. The solution is to push the recession forecasts further out in time and so the recent run of warnings tend to see trouble in a year or more’s time. The longer time table offers better odds of accuracy since the further out in time you look the greater the likelihood that a recession will strike.

The reality, of course, is that predicting recessions beyond a couple of months is little more than guessing. That’s because the factors and interactions that create downturns are wickedly complex. As a result, modeling this process on a forward-looking basis is hopelessly flawed.

A more reliable approach is to analyze the data published to date and estimate the risk in real time. To further strengthen this framework it’s best to look at a broad mix of indicators, including several business-cycle indexes. Not surprisingly, this model of estimating recession risk has fared well for developing perspective on economic risk with a low level of false signals, as suggested by The Capital Spectator’s monthly macro updates and the weekly reviews via The US Business Cycle Risk Report.

But developing solid recession estimates in real time isn’t easy, in part because the process demands looking at a large data set regularly. By contrast, cherry picking indicators and looking for trouble a year or more down the road tends to draw a crowd.

Yes, there’s always another recession on the horizon. But if you’re interested in a high degree of reliability that’s timely, it’s crucial to ask two questions of your favorite economic forecaster: What’s your model and what’s your forecasting record?

On that note, here’s a sampling of recent forecasts that see trouble ahead:

The U.S. could face a recession by next year or in 2020 as a growing threat of inflation forces the Federal Reserve to raise interest rates more quickly than anticipated, Colorado Springs economist Tatiana Bailey said Tuesday.
Colorado Politics, Feb. 28, 2018

A recession will hit the US economy next year, warns David Vickers, multi-asset portfolio manager at Russell Investments.
Morningstar, Feb. 26, 2018

Hedge fund billionaire: 70% chance of recession before 2020 election
CNN Money, Feb. 22, 2018

Prognosticator Alan Beaulieu of ITR Economics was in Bend on Thursday to tell a rapt audience when to expect the next downturn. Based on his New Hampshire firm’s proprietary leading indicator, he thinks the next recession will hit late this year and last into the first half of 2019.
The Bulletin, Feb. 8, 2018

Andrew Staples, director of the Economist Intelligence Unit for Southeast Asia, said his firm expects the U.S. economy to slip into a technical recession in early 2020.
CNBC, Jan. 23, 2018

The Trump Recession is coming… History suggests that the next recession is not far off.
David Von Drehle, Washington Post, Jan. 5, 2018

A financial warning sign that preceded the last seven recessions is about to signal again, and that could mean a recession in 2018 is coming…
Money Morning, Nov. 30, 2017

Guggenheim’s Model Points to Recession in Late 2019 or 2020
Guggenheim Investments, Nov. 29, 2017

Wells Fargo formula shows recession looming in next 18 months
Orange County Register, Nov. 22, 2017

There is 69.2 Percent Chance of Recession
Colorado Biz, Oct. 22, 2017

Marathon Asset Management boss Bruce Richards is gearing up for the next global recession, which he reckons could be less than two years away.
The Economic Times, Oct. 4, 2017

Earlier this year, FS Insider discussed a new machine-learning “forecasting engine” developed by San-Diego-based Intensity Corporation used for economic and revenue forecasting, large-scale investing, supply chain optimization, and a wide range of other areas. The current forecast their platform is giving for a US recession is June 2019…
Financial Sense, Aug. 18, 2017

But there is another recession in our future (there is always another recession), which I think will ensue by the end of 2018. And it’s going to be at least as bad as the last one was in terms of the global pain it causes.
John Mauldin via Forbes, Jul. 27, 2017

4 thoughts on “The Recession Predictions Keep Coming: An Update

  1. Hale Stewart

    I have to admit, I’m guilty of this, due to the Fed’s current rate hiking policy combined with a narrowing yield curve, which is usually an end-of-cycle event. But, you make an incredibly valid point:

    “That’s because the factors and interactions that create downturns are wickedly complex. As a result, modeling this process on a forward-looking basis is hopelessly flawed.”

  2. James Picerno Post author

    Hale,
    To be fair, I’m no less guilty, which is why monitoring the business cycle through an objective lens is essential to maintain perspective. The news cycle tends to be misleading on this front, because it favors what just happened and dramatic updates vs. looking at a broad set of indicators in context. A little voice in my head has whispered several times in recent years that it looks like we’re heading into a recession. Fortunately, I managed to refrain from doing anything foolish with my investment portfolio courtesy of keeping an eye on a broad review of indicators and business-cycle benchmarks via the US Business Cycle Risk Report. One day the macro trend will stumble, but trying to predict when that happens months or years in advance is beyond the skill set of mere mortals.
    –JP

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