Christie Romer on Our Inability to Forecast Recessions
Daniel Gross quotes Christie Romer:
The Forecast for the Forecasters Is Dismal - New York Times: Christina Romer, professor of economics at the University of California, Berkeley, says economists can't predict recessions for the same reason stock market analysts can't accurately predict market crashes. "Both kinds of events, by their nature, are not predictable events," she said. Almost all the postwar recessions were preceded by a shock, like a spike in short-term interest rates, or a sharp rise in oil prices. "It's impossible to see the shocks coming," Ms. Romer said.
The very infrequency of recessions in the United States may make it more challenging to detect their imminent arrival. An entire generation of economists has grown up believing that the business cycle is largely something of the past, like black-and-white TV. Since March 1991, there has been only one recession, which lasted eight months. It's like asking people who spend their time in Alaska to start forecasting tropical storms.
AS a group, forecasters certainly don't see a recession coming. On Feb. 13, those of the Federal Reserve Bank of Philadelphia collectively raised their estimates for real gross domestic product growth for 2007 to 2.8 percent, from 2.6 percent...
Over the past twenty years we have spent about 18 months in "recession" by the NBER's chronology--that's only 7.5% of the time. Moreover, as I wrote last fall:
The odds of economic meltdown | Salon.com : Forecasting recessions is a fool's game. If there is enough solid economic information to make it appear highly likely that a recession is coming -- that production, employment and consumer demand will actually fall -- then it is highly likely that there already is a recession. Businesses are not stupid, and they don't have to wait for economists to tell them what they already know. By the time a gloomy forecast has been issued they've probably already noticed a drop in consumer demand and responded by firing workers and reducing production.
So: Never say that a recession is coming. Say only that a recession is here, or that there might be a recession on the way. Which, in fact, is what I'm saying today. As of the beginning of August 2006, a recession is not here, and I'm not going to violate my own rule by saying one is coming...
However, it is still the case that:
there is a good chance -- for the first time since 2003 -- that there might be a recession in progress six months from now...
That's what Greenspan was talking about last week: possible, not certain.
