“It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble,” said a prominent economist.
No, he wasn’t referring to our current situation. This statement was made in January 2008, and the worst U.S. recession since the Great Depression had already started.
In a display of revisionist history, everyone seems to believe that the housing bubble and ensuing recession were widely foreseen, but they simply weren’t.
Despite all that we’ve been through, economists seem to be as clueless as ever.
What’s more, the next recession isn’t likely to be as bad as the last one (at least in the United States). So, if economists had a hard time spotting the Great Recession in real time, then rest assured that a garden variety recession is going to be completely unanticipated.
And we may be witnessing the start of a recession right now…
In late April, we learned that preliminary U.S. real GDP growth for the first quarter of 2015 was just 0.2% – lower than 82 of the 86 estimates from economists polled by Bloomberg.
Interestingly, the Atlanta Fed’s GDPNow forecasting model actually nailed the number by predicting 0.1% growth.
However, information released in May indicates that growth actually contracted quarter over quarter. Barclays Capital and JPMorgan (JPM) both lowered U.S. Q1 GDP estimates to negative 1.1% after disappointing factory order data revisions last Thursday.
Now, it even looks as if the second quarter is imperiled. Retail sales for April were disappointing. Again, economists had expected that a decline in gasoline prices would boost consumption, which hasn’t happened.
What’s truly amazing is that retail sales and food services (excluding motor vehicles and parts dealers) contracted versus the year-ago figure. As can be seen in the chart below, retail sales growth is actually lower than it was at any point during the recession in 2001!
On Friday, we learned that industrial production contracted in April. GDPNow’s forecast for the second-quarter growth is running at just +0.7%.
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Granted, some components of GDP – such as net exports (trade) and changes in private inventory levels – are extremely difficult to forecast, so the model isn’t going to appear prophetic every quarter. Nonetheless, it’s a good approximation.
All of this points to a grim conclusion: The probability of a U.S. recession is increasing. Ironically, the Federal Reserve is supposed to be raising short-term interest rates sometime this year.
The Elusive Normalization
I hate to beat a dead horse, but economists have been wrong about the timing of Fed action, as well. A rate hike had been expected in June, but that’s obviously not going to happen.
According to a Wall Street Journal poll conducted last week, 73% of economists surveyed expect the Fed to start raising rates in September.
As I’ve said before, the economic data – which are turning abysmal – simply don’t support a hike.
Nonetheless, the Fed seems predisposed to tighten monetary policy. After all, full employment is half of its dual mandate. The unemployment rate (however misleading it may be) is at 5.4%, down from 10% in 2009.
Perhaps Fed Chair Janet Yellen wants to hike in an attempt to promote “financial stability,” which she admitted has sort of become an “unwritten third mandate.”
Welcome to the theater of the absurd! The Fed has a history of facilitating excessive leverage and speculation, causing instability. The credit-fueled shale oil boom is just the latest example.
The leverage and speculation already in the system will make it very hard to tighten.
Indeed, if the Fed does want to hike, its road ahead has some scary precedents. A handful of major central banks have attempted to raise interest rates in recent years: the Bank of Japan in 2006, the Riksbank (Sweden) in 2010, and the European Central Bank in 2011.
Ultimately, these tightening campaigns failed, and the policy rates were once again lowered. All three central banks have since engaged in quantitative easing (even more stimulus).
If the Fed does raise rates, we’ll likely experience a similar fate. Just don’t expect economists to provide anything besides comic relief throughout the entire journey.
Safe (and high-yield) investing,
Alan Gula, CFA