All Business: :Economists say recession could loom, but should we believe them?

All Business: :Economists say recession could loom, but should we believe them?

By: AP

NEW YORK (AP) — Alan Greenspan thinks there is a 50 percent chance the economy will head into a recession. Let’s just hope this is just another fumbled forecast by the former Federal Reserve chairman.
He certainly doesn’t have his prognostication record on his side. Neither do many of his economist peers, who have often missed the mark in predicting when the economy’s growth would begin to contract. In the past, they’ve largely been too upbeat about the economy’s prospects, failing to see a recession had already begun. This go around, many are expecting the worse, forecasting that a recession will hit next year.
The trouble is that recession-forecasting is largely a guessing game. It takes hindsight to really know if economic growth has contracted for a period of months — sometimes you are in a recession and don’t even know it.
The National Bureau of Economic Research, a private, non-profit, non-partisan research organization, ultimately decides when recessions start and end, based on historical data.
Figuring out what’s going on with the economy now is no easy feat. The credit crisis, which has grown out of the collapse in the mortgage and housing markets, has boosted borrowing costs and restricted the availability of credit for consumers and businesses.
To prevent that from sinking the economy, the Fed — under the leadership of Greenspan’s successor, Ben Bernanke — has cut the rate on overnight loans that banks make to each other by a full percentage point to 4.25 percent in three rate reductions since September. The Fed now is somewhat handcuffed in how much more it can slash this rate. Inflationary pressures have begun to mount, and lower rates would only fuel higher prices by adding more money to the economy. It also could affect consumer and business spending because everything costs more, and the overall economy suffers as a result.
The last thing the Fed wants to see is an economy slowing at the same time that inflation is rising. That ugly scenario, which came to be known as stagflation, first appeared in the 1970s when a series of oil-price shocks sent inflation soaring while the economy struggled with stagnant growth. Greenspan touched on that as he made his talk-show rounds in recent days. Retired from the Fed for nearly two years and now an independent consultant, he still is in much demand for his views on the current state of economic affairs.
“The probabilities of a recession have moved up to close to 50 percent — whether it’s above or below is really extraordinarily difficult to tell. I think that’s correct,” he said during an interview on ABC’s “This Week” that was broadcast on Sunday.
That’s a grim assessment from Greenspan, who during his 18-year tenure at the Fed’s helm gave some rosy outlooks that often turned out to be bad calls, according to Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
For instance, the bloggers at Calculated Risk, which offers commentary on finance and economics, dug up some remarks made by Greenspan in 1990 that eventually proved to be wide of the mark.
—“In the very near term, there’s little evidence that I can see to suggest the economy is tilting over,” he said in July of that year, during a meeting of the Federal Open Market Committee.
—“Those who argue that we are already in a recession I think are reasonably certain to be wrong,” he followed up with in August 1990, at the FOMC meeting.
—“The economy has not yet slipped into recession,” Greenspan said in October 1990.
It turned out the recession he didn’t see coming had already started — in July of that year.
Greenspan isn’t alone in getting it wrong. Baker also notes that in the fall of 2000, not one of the “Blue Chip 50” forecasters saw the 2001 recession coming.
He also points to the Federal Reserve Bank of Philadelphia’s twice-yearly Livingston Survey of economists, which in June and December of 2001 “saw nothing but clear skies ahead,” Baker said. It turns out that the National Bureau of Economic Research later deemed that the recession had begun in March of that year.
This time around, the 36 respondents to the December Livingston Survey — a who’s who in the economics world — collectively aren’t forecasting a recession yet, though they slashed their estimates for growth in the first half of 2008 to 1.9 percent from 2.9 percent in June.
Plenty of those prominent economists, like Greenspan, still believe that a recession could come. A year from now we should know if they called this one right.
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On the Net:
Calculated Risk: http://calculatedrisk.blogspot.com/
Dean Baker’s blog: http://www.prospect.org/csnc/blogs/beat—the—press
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
Published in The Messenger 12.19.07

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