Can we all be wrong?
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It wouldn't shock anyone if we slipped into a recession in 2023 — that's the widely held expectation of what will happen. Everyone from economists to CEOs to your neighbor who works in geology is calling for one.
But sometimes, when the majority expects one thing, the opposite happens. The economy has a history of surprising people, so why not again now?
What Economists are Expecting
The Wall Street Journal conducts a quarterly survey to help readers better understand the direction of the U.S. economy. They have conducted their Economic Forecasting Survey for over 35 years, using a panel of academic, business, and financial economists.
Their latest poll was in October. The data for that poll, and each one dating back to 2003, can be foundhere.
Looking through the data, there are some interesting developments.
Regarding interest rates (which we've seen in 2022 can dominate market returns), 59% believe the Federal Reserve will raise interest rates too much and cause unnecessary economic weakness. Only 5% believe the Fed will raise interest rates too little and allow inflation to remain too high.
Asked when to expect the Federal Reserve to reverse course and make a ratecut,the most popular answers were 2023 Q4 and 2024 Q1.
WSJ Survey
Aside from interest rates and the Federal Reserve, they were polled on several other major economic data points. The aggregate believes we will have slightly negative GDP growth in the first half of 2023, sandwiched between quarters of less than 1% growth.
WSJ Survey
One of the scariest parts of a recession is increased unemployment. Things start getting worrisome when people start losing their jobs and have difficulty paying their bills. A silver lining of the survey is the unemployment rate is not expected to increase much.
WSJ Survey
Lastly, everyone's favorite new economic topic, inflation, was also asked about. It will likely be many more months until inflation subdues.
WSJ Survey
Economists Are Never Right
Niels Bohr, Nobel Prize winner and father of the atomic model, has a great quote on what to expect in the future,
Prediction is very difficult, especially if it’s about the future!
Economic forecasting is a flawed science — it always has been and always will be. There are a couple of reasons why,
- A small change in a few variables can completely change a forecast
- Forecasts are based on historical data, which is already at a lag. Plus, tomorrow's environment is not the same as yesterday's
And the most important reason, humans are not rational creatures.
Economics is "the social science that studies the production, distribution, and consumption of goods and services." All of these activities are done by individuals, on a scale as small as an individual or as large as a group of countries.
We make decisions that could be construed as emotional, dumb, or short-sighted. It's hard for economic models to factor in these irrational decisions.
The biggest headline of the WSJ survey is the probability of a recession in the next twelve months. The survey caught readers’ attention when it announced we had a 63% chance of a recession (the average of all economists polled.) That's one of the highest numbers ever recorded.
The highest polled probability of a recession was 100%. The lowest, 1%. That is a very wide spread.
The Philly Fed runs a similar survey. Lucky for us, economists are usually incorrect.
Since that Philly Fed survey started, not a single recession was spotted a year in advance. Economists missed the 1990, 2001 and 2008 recessions completely.
Lastly, to point out why economists can't be taken as truth, most of them missed the high inflation we are now seeing. Below is from the January survey.
WSJ Survey
The expectation was that inflation would be 5% in June and down to 3% in December. This comes after the Federal Reserve announced in December 2021 that inflation was no longer "transitory."
CPI in June was 9.1% and December will be around 7%.
Final Thoughts
Economists don't deserve all the hate. Predicting the future is difficult in any profession, whether it's the outcome of a sports game, the economy, the demand for any product, or if it will rain next week.
But anyone who puts aforecast out for the publicis open to criticism when their forecast inevitably turns out incorrect.
The majority of economists are expecting a recession. If I were polled, I would agree that we are more likely to have a recession than not; there are many reasons to believe that.
But, I'm an optimist. There are still some reasons to believewe won't have one.
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