Beware the ‘No Recession’ Call: Economic Data Lags Reality
Economists no longer expect a recession. Such was according to a recent WSJ survey of Wall Street economists. To wit:
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WSJ-Recession Forecasts
The Federal Reserve also suggests the same. Following the September FOMC meeting, the and upgraded its economic forecast to include a scenario.
Economic Forecasts
The problem with that optimism is that it is entirely based on lagging economic data.
More importantly, that lagging data is subject to relatively large negative revisions in the future.
Furthermore, as discussed previously, tighter monetary policy’s “lag effect” is still working through the system. As Michael Lebowitz noted:
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Fed Funds and The Lag Effect
In other words, if the average delay between the final rate increase and recession is 11 months, and the last hike was in July 2023, the risk to forward expectations is quite elevated.
Such is why the Fed and economists are always a day late and a dollar short.
A Day Late And A Dollar Short
Given the dependence on economic data subject to significant revisions, it is unsurprising that the Fed and economists are often incorrect in their prognostications. As we noted earlier:
Fed GDP Projection
Of course, economists are not much better. Let’s revisit the WSJ survey of Wall Street economists from above.
However, this time, we will note the dates that the National Bureau Of Economic Research (NBER) dated the beginning and end of the last two recessions.
WSJ Recession Probability vs NBER-Dating
While this sample size is relatively small, it does reinforce the point that economists are generally wrong about a scenario.
The problem with assessing the state of the economy today based on current data points is that these numbers are only “
Economic data is subject to substantive negative revisions as data gets collected and adjusted over the forthcoming 12- and 36-months.
Consider for a minute that in January 2008, Chairman Bernanke stated:
In hindsight, in December 2008, the NBER dated the start of the official recession in December 2007.
If Ben Bernanke didn’t know a recession was underway, how would we?
Let’s take a look at the data below of real economic growth rates:
NBER GDP Peak vs Recession
Each of the dates above shows the economy’s growth rate immediately before the onset of a recession.
You will note in the table above that in 7 of the last ten recessions, real GDP growth was running at 2% or above. In other words, according to the media, there was NO indication of a recession.
But the next month, one began.
The chart below shows the S&P 500 with two dots. The blue dots are when the recession started.
The yellow triangle is when the NBER dated the start of the recession. In 9 of 10 instances, the S&P 500 peaked and turned lower before the recognition of a recession.
NBER w/Recession Dating vs Market Realization
Do you see the problem of the call by economists?
Waiting On The Data
While the WSJ economists are seemingly confident in their expectation of “ the economic data hasn’t caught up with economic realities. The table below shows the date of the market peak and real GDP versus the start of the recession and GDP growth at that time.
Recession And NBER Dating Table
For example:
- the economy fell into recession,
As noted above, during 2007, most media, analysts, and the economic community proclaimed there was
They were wrong.
Today, we are once again seeing many of the Leading economic indicators, inverted yield curves, and the change in monetary velocity suggest the risk of a recession is elevated.
There are three lessons to be learned from this analysis:
We suspect the bevy of WSJ economists will again be incorrect in their assumptions.
Unfortunately, we won’t have that evidence until it is too late.
