What’s It Take For Economists To Forecast U.S. Recessions Accurately?

circa 1925: Curb Market traders gesture with their hands to trade stocks, on Wall Street, New York … [+] City. The Curb Market was for stocks not listed on the New York Stock Exchange. (Photo by Hulton Archive/Getty Images)

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Getting a job as a Wall Street economist is supposed to require great skill. But apparently that skill doesn’t mean developing the ability to forecast big events like recessions.

A year and a half after the ‘recession call’ started and we still have no recession. In fact, the U.S. is now growing faster than it has in ages. It flies in the face of the collective message from Wall Street. And that has me wondering what’s up.

Most economists on Wall Street have multiple degrees in economics, often from high-priced universities. They’ve learned the ins and outs of ridiculously complicated mathematics that is meant to support their findings.

Yet, in the middle of 2022, the average Wall Street economist told us that the U.S. was facing an imminent recession. This recession, they said, would be deliver promptly because the Federal Reserve was raising the cost of borrowing money.

Santa Ana, CA – October 01: Billionaire investor Bill Gross in Orange County Superior Court in Santa … [+] Ana, CA, on Friday, October 1, 2021. The court found that Gross violated a court-issued restraining order by disturbing the peace while playing loud music on his property. Gross and his wife, Amy Gross, have been in an ongoing dispute with his Laguna Beach neighbors, Mark Towfiq and Carol Nakahara. (Photo by Jeff Gritchen/MediaNews Group/Orange County Register via Getty Images)

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It hasn’t happened. Yet some people keep pushing the same narrative. For instance, Bond King Bill Gross says without a doubt that there will be a recession in the fourth quarter, according to a Fortune magazine story. I have no idea whether he’ll be correct, but we’ll no doubt see in a few weeks.

Another economist said we actually did have a recession earlier this year but nobody noticed, according to a report in Fortune. There are so many smart-ass remarks that could be made here, so I won’t, other than to say how much of a recession was it if no-one noticed? Maybe it’s what they call a technical recession of two back-to-back quarter of negative growth.

Third Quarter Boom Busts Recession Call

The latest data also flies straight in the face of recession forecasts. The advanced-reading for Gross Domestic Product for the third quarter was annualized growth of 4.9%, according to data collated by the Briefing.com website.

That recent growth is roughly double the growth rate for the preceding four quarters which grew between 2.1% and 2.7%. And yes there were multiple issues under the hood to debate for every one of those quarters. But still, Captain America seems to have knocked the ball out of the park.

Put another way, the collective recession call was in the entirely wrong direction — the economy has growth faster, when the forecast was for it to shrink.

There’s probably another factor going on here. On Wall Street it’s ok to be wrong as long as you are in the majority. If everyone of your economics competitors is calling for an imminent recession then it’s probably best for you to do the same. That’s true even if you k now its wrong.

Majority Rules

In banking if you are in the minority, then you will be very lonely and much more liable to get fired. When I worked on Wall Street I witnessed pressure on analysts to conform even when they had contrary evidence that upends the prevailing zeitgeist. The truth didn’t matter, the majority was what counted.

At the beginning of this story I wanted to write that my cat could do better than many Wall Street economists. But then I realized that my cat wouldn’t do anything that went with the majority.