Time to Admit That Economists Cannot Predict the Next Recession
The stock market is soaring, breaking new records every day. The Dow Jones Industrial Average crossed the 50,000 mark for the first time in history on February 9, 2024. The S&P 500 and the Nasdaq are also at unprecedented levels, boosted by strong corporate earnings, consumer spending, and optimism about the post-pandemic recovery. Many investors are celebrating the longest bull market in history, which has lasted for more than 12 years since the end of the Great Recession in 2009.
But while the stock market is a good indicator of the current mood of the economy, it is not a reliable predictor of the future. In fact, history shows that the stock market often reaches its peak just before a recession hits. For example, the Dow Jones reached its then-highest level of 14,164 on October 9, 2007, only to plunge by more than 50% in the next 17 months as the global financial crisis unfolded. Similarly, the Nasdaq reached its then-highest level of 5,048 on March 10, 2000, only to collapse by more than 75% in the next two years as the dot-com bubble burst.
So, if the stock market is not a good forecaster of recessions, what about economists? Surely, they have the tools and the expertise to anticipate and warn us about the next downturn. Unfortunately, the evidence suggests otherwise. Economists have a dismal track record of predicting recessions, often missing them completely or being too late to recognize them. A study by the International Monetary Fund (IMF) found that between 1992 and 2014, economists failed to predict 148 out of 153 recessions in 63 countries. Another study by the Bank for International Settlements (BIS) found that between 2008 and 2018, economists underestimated the severity of recessions in 33 out of 49 countries.
Why are economists so bad at forecasting recessions? There are several reasons. First, recessions are rare and complex events, driven by a combination of factors that are hard to measure and model. Second, economists tend to rely on historical data and trends, which may not capture the changing dynamics and risks of the modern economy. Third, economists face cognitive and institutional biases, such as groupthink, confirmation bias, and political pressure, that may cloud their judgment and prevent them from challenging the prevailing consensus. Fourth, economists have limited access to real-time and high-frequency data, which may reveal the early signs of a slowdown or a shock.
Given the limitations and failures of economists, it is time to admit that they cannot predict the next recession. This does not mean that we should ignore their analysis and advice, but rather that we should take it with a grain of salt and be prepared for the unexpected. Instead of relying on economists, we should pay more attention to other indicators that may signal a looming recession, such as the yield curve, the unemployment rate, the consumer confidence index, and the OECD composite leading indicator. These indicators are not perfect, but they may provide more timely and accurate information than the stock market or the economists.
Moreover, we should focus more on building resilience and flexibility in our economy and society, rather than trying to forecast and prevent recessions. Recessions are inevitable and sometimes necessary, as they correct the imbalances and excesses that accumulate during the boom periods. Rather than trying to avoid them at all costs, we should embrace them as opportunities to learn, innovate, and reform. We should also ensure that we have adequate buffers and safety nets to cushion the impact of recessions on the most vulnerable groups and sectors. By doing so, we can emerge from recessions stronger and more sustainable than before.
