Thursday, 13 September 2007

Economists hedge their bets

When it comes to forecasting economists have a woeful track record. If economists were held to the same standards as physicians they would be mired in malpractice suits. To be fair we shouldn't expect much of such a speculative area of investigation. However the primacy Economics is given in our society today leads us to expect more from the profession.

Now that little rant is out of the way The Wall Street Journal did an article on economists views on the likelihood of a US recession. If you click on the above link you can also watch Kelsey Hubbard of interview David Wessel, global economics editor for the WSJ.

The 50 or so market forecasters surveyed put the percentage chance of a US recession at 36% up from 28% a month ago. 11 of the 50 put the chance of a recession at 50% or more whilst 9 put it at less than 30%. The forecast ranged from 5% to 90%.

I have a question. What happens if the US economy goes into recession and someone had forecast a 40% probability that it would occur, does that make them 40% right and 60% wrong? How about if you gave recession a 10% chance 6 months out from it happening but a 90% chance 6 weeks before it started? Do we take a weighted average over time?

I enjoy most of what Barry Ritholtz at THE BIG PICTURE has to say but I had to chuckle the other day when he announced, like he was a market maverick, that he'd upped his chance of recession to 65%. Oooh go out on limb why don't ya Barry.

An economy either goes into recession or it doesn't. It's never 40% in a recession and 60% not in one. If you haven't made a definitive call at least 6 months out from the official start of a recession you are sitting on the fence in my book and can't be credited with a correct call even if you had it pegged at say 65%.