Nov 20

A View of the Economy That Is Worth Your Time

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Most economists’ projections of how economies will perform are incredibly similar, due to:

1 – Most forecasters work for firms at financial institutions which are designed to SELL something…and I don’t mean good economic advice.  The economist is considered someone who can explain what at times is the unexplainable…and who can help legitimize the recommendations of his or her firm.

2 – There is very little advantage to being an outlier, unless you want to gamble on getting it right when all others are wrong.  The latter is a risky strategy (one can look like a fool in many cases), so most economists, like most investment managers, stick close to their benchmark — and the benchmark for the economist is what his peers are predicting.

However, every once in a while, an independent economic group is able to add significant value.  We have found that in the case of the Economic Cycle Research Institute for recession/inflation predictions, and we recently found it in a paper from the Levy Economics Institute of Bard College.  Take a peek at their publicly available research, “The U.S. Economy: Is There a Way Out of the Woods?”

Like any good academic paper, it starts with multiple equations — that took me back to my old economics courses.  But, please take a look at the last two graphs for what they are predicting for US GDP over the next five years in a ‘soft landing’ and a ‘credit crunch’ scenario.  Yes, there are lots of assumptions here, but the conclusions are fascinating:  In a ‘credit crunch’ scenario, expect no to -1% growth in GDP by the end of 2008, before things start picking up.  And, in a ‘soft landing’ scenario, GDP falls as low as a bit under 1% toward the end of 2008, before picking up.

This is significantly different from the expected 2.5% growth in GDP forecast by the heard of economists in the recent WSJ survey.  More importantly, its carefully reasoned approach provides solid insight during this interesting time in the financial markets.

And that is the kind of solid insight we all need, as we take time to reflect on the most important part of our lives: family and friends.  I hope you and your family have a very Happy Thanksgiving!