Is the economy heading into recession?

Commentary about business and finance.
July 31 2006 5:58 PM

The "R" Word

Are we heading into a recession?

Illustration by Mark Alan Stamaty. Click to expand.

Last week, the Commerce Department reported that the pace of economic growth had slowed dramatically, from a 5.6 percent annual rate in the first quarter to a 2.5 percent annual rate in the second quarter.

For months, members of what I call the Gloom & Doom Caucus have been warning that the inevitable slowdown in housing, rising inflation, a lack of saving, and excessive debt would send the economy off the rails. But very few have dared predict that the economy would stop growing altogether. And while no economist is prepared to declare an immediate end to the current economic expansion, which turns 5 this fall, a few pessimists have (cautiously) started using the "R" word.

Advertisement

Let's meet the fearmongers, in descending order of certainty:

Gloomy forecaster No. 1
A. Gary Shilling
Likelihood of recession:
Unclear, but it could be soon. Shilling, a well-known economic consultant and adviser, last week told an interviewer that "the economy is slowing, and I suspect that by the end of the year it could very well be in recession."
The main culprit: Slowing housing market.

Gloomy forecaster No. 2
Nouriel Roubini, economics professor at New York University's Stern School of Business and proprietor of mega-macroeconomics blog Roubini Global Economics Monitor.
Likelihood of recession: 50-50, but timing is unclear. As he noted: "I do not now predict with high probability a recession but now believe that its probability has significantly increased to around 50 percent."
The main culprits: Higher oil, which will have "a stagflationary effect"; a weak housing market; and rising interest rates.

Gloomy forecaster No. 3
David Rosenberg, economist at Merrill Lynch.
Likelihood of recession: 40 percent and rising, though probably not this year.
The main culprit: The slowdown in housing.

Gloomy forecaster No, 4
Michael Mussa, former chief economist at the International Monetary Fund, currently at the Institute for International Economics.
Likelihood of recession: 25-30 percent in 2007, as Bloomberg reported.
The main culprit: Rising energy prices.

Note that all these predictions are conditional, couched, and otherwise qualified. But while they seem mild, they represent a radical divergence from the crowd. The economists surveyed by the Wall Street Journal (go here to see the forecasts) as a group foresee growth of 3 percent for the third quarter of 2006, 2.8 for the fourth quarter, and 2.7 percent for the first half of 2007. That's nowhere near a recession. And not a single member of the Journal group forecasts even a single quarter of negative growth. Other prominent forecasts are similar. The Federal Reserve Bank of Philadelphia's quarterly forecasting survey of 53 economists projects robust economic growth of 3.4 percent in 2006 and 3.0 percent in 2007.

Of course, we shouldn't expect groups of economic forecasters to see a recession coming. Sometimes it seems like the people who crunch the data and construct models are the last to know. They tend to extrapolate based on existing trends, and as a result they're not very good at calling the tops or bottoms of the economy. When two economists, James Stock of Harvard and Mark Watson of Princeton, looked at the Philadelphia Fed forecasts at the time of the last recession, they found that in late 2000, the group thought the economy would grow at a 3.3 percent rate in the first quarter of 2001. It wound up contracting at a 0.6 percent annual rate.

The problem with recession forecasting is that you never know when a recession has started until long after it begins. The National Bureau of Economic Research is the official dater of recessions, and it doesn't make forecasts. We could be in a recession now, for all we know. Lakshman Achuthan and the team at the Economic Cycle Research Institute have an excellent track record on predicting recessions (they were among the only forecasters to accurately predict the last recession). And they still believe the expansion is intact.

TODAY IN SLATE

History

Slate Plus Early Read: The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Rehtaeh Parsons Was the Most Famous Victim in Canada. Now, Journalists Can’t Even Say Her Name.

Mitt Romney May Be Weighing a 2016 Run. That Would Be a Big Mistake.

Amazing Photos From Hong Kong’s Umbrella Revolution

Transparent Is the Fall’s Only Great New Show

The XX Factor

Rehtaeh Parsons Was the Most Famous Victim in Canada

Now, journalists can't even say her name.

Doublex

Lena Dunham, the Book

More shtick than honesty in Not That Kind of Girl.

What a Juicy New Book About Diane Sawyer and Katie Couric Fails to Tell Us About the TV News Business

Does Your Child Have Sluggish Cognitive Tempo? Or Is That Just a Disorder Made Up to Scare You?

  News & Politics
History
Sept. 29 2014 11:45 PM The Self-Made Man The story of America’s most pliable, pernicious, irrepressible myth.
  Business
Moneybox
Sept. 29 2014 7:01 PM We May Never Know If Larry Ellison Flew a Fighter Jet Under the Golden Gate Bridge
  Life
Dear Prudence
Sept. 30 2014 6:00 AM Drive-By Bounty Prudie advises a woman whose boyfriend demands she flash truckers on the highway.
  Double X
Doublex
Sept. 29 2014 11:43 PM Lena Dunham, the Book More shtick than honesty in Not That Kind of Girl.
  Slate Plus
Slate Fare
Sept. 29 2014 8:45 AM Slate Isn’t Too Liberal, but … What readers said about the magazine’s bias and balance.
  Arts
Brow Beat
Sept. 29 2014 9:06 PM Paul Thomas Anderson’s Inherent Vice Looks Like a Comic Masterpiece
  Technology
Future Tense
Sept. 29 2014 11:56 PM Innovation Starvation, the Next Generation Humankind has lots of great ideas for the future. We need people to carry them out.
  Health & Science
Medical Examiner
Sept. 29 2014 11:32 PM The Daydream Disorder Is sluggish cognitive tempo a disease or disease mongering?
  Sports
Sports Nut
Sept. 28 2014 8:30 PM NFL Players Die Young. Or Maybe They Live Long Lives. Why it’s so hard to pin down the effects of football on players’ lives.