Jun 9, 2022 - Economy & Business

The disutility of economic forecasts

A hand with a stick pointing to a trend line

Illustration: Aïda Amer/Axios

You might have heard that we're headed for a recession, or possibly even in one already. If you did, then whoever you heard it from — whether it's JPMorgan CEO Jamie Dimon or former SEC chair Harvey Pitt or multi-platinum recording artist Cardi B — is moonlighting as an economic forecaster.

Why it matters: Economic forecasts are ubiquitous, useless, and carry a whiff of the ignoble. If you can ignore them, it generally behooves you to do so.

By the numbers: About 55% of Americans currently believe — falsely — that we're in a recession right now, per YouGov, while only around 22% have the true belief that we aren't.

  • U.S. real GDP is on track to grow at a 2.8% pace this quarter and a 2.5% pace next quarter, per FactSet estimates. The latest OECD forecast shows 2.5% growth in the U.S. this year, and positive growth in all of its 25 member states, as well as the eurozone (2.6%) and the world (3.0%).

The Sahm Rule — a test of whether we're currently in a recession — is in negative territory, implying that we're nowhere near one. (It needs to be above 0.5 to indicate a recession has arrived.)

  • Bloomberg's Joe Weisenthal notes: "Talk of recession has been everywhere except in the actual economic data."

The big picture: High inflation and gas prices, falling stock prices, and rising interest rates all make people grumpy. If you feel grumpy, you're more likely to think we're in a recession.

  • Recession forecasts can be bad for the economy: Grumpiness on a wide enough scale can become a self-fulfilling prophecy.
  • The business cycle waxes and wanes based on the "animal spirits" in the economy, and if CEOs cut back on hiring and spending, that will feed through to disposable income and ultimately GDP growth.

The other side: While it's easy to conflate inflation or a bear market with a recession, they're not at all the same thing.

  • It's entirely possible for the economy to grow at a healthy clip while inflation is high. If that causes the Fed to raise rates, that can in turn increase the discount rate used to value equities, causing stocks to fall. In other words, a strong economy can be bad for markets.

Between the lines: Economists have a dreadful track record when it comes to predicting recessions. Even when we're already in one they generally continue to blithely forecast steady growth.

The bottom line: The consensus view that there won't be a recession is generally correct. Recessions are rare things, and if you always predict growth, you'll be right much more often than you're wrong.

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