Predictions - A Brief History

Created 1/12/09

This is a brief recap (in no way all-inclusive) of some forecasts and predictions that have been made during the Financial Crisis. It reflects what I would term the “widely perceived” mindset of the time. This recap is meant to highlight the difficulty of economic forecasting during this period, as well as provide a “skeleton” reference source for this site:

Starting in the spring of 2007, there begin widespread recognition that there were “issues” developing with low- and lower-grade mortgages and their various derivatives. However, the general feeling was that this issue was “isolated” and “contained,” meaning that it would not, and could not, spread into the economy at large, creating general economic problems.

On 6/27/07, Treasury Secretary Henry Paulson said, “I’ve never seen a stronger global economy.” Also, “The financial system is healthy and liquid. I can’t think of a time when you look at banks and see so few bad loans.”

Late August 2007: A major brokerage announces that housing (as seen in the Case-Shiller index) would decline 7% y-o-y in end-of-year prices for both 2007 and 2008; a major bank confirms the same forecast.

A February 18, 2008 Fortune Magazine story, “Recession? Where to put your money now,” stated: “But any slump is likely to be short and mild, mainly because Washington is on the case.” Also, “By midyear the flood of liquidity will be channeled into new loans for companies and consumers. A resurgence in easy credit – stoking the appetite for everything from big-screen TVs to capital equipment – will be practically irresistable.”

This general feeling continued. In March 2008, Henry Paulson made a comment that “the U.S. is fundamentally on sound footing and would dodge a recession.”

Although Bear Stearns failed in March 2008, it appeared to be a rather isolated incident at the time.

In an April 3, 2008 story, The Wall Street Journal stated, “Mr. Bernanke said he expects the economy to rebound slowly in the second half of the year, as the impact of lower interest rates and recently passed stimulus legislation kicks in. Still, he added, ‘in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.’”

On June 12, 2008 The Wall Street Journal reported on its latest Wall economic forecasting survey which stated, “Underscoring the uncertainty over the current outlook, the economists split nearly evenly on whether the U.S. is in recession.” The story went on to say, “For the rest of this year and into next, economists see slow U.S. growth and unemployment at around 5.7%, up slightly from 5.5% reported for May.”

On July 2, 2008 a Reuters article, “Merrill says GM bankruptcy ‘not impossible,’” states Merrill Lynch analyst John Murphy said that for GM, “We believe $15 billion is necessary…” Also, of note, “Murphy forecasts light vehicle sales of 14.3 million units this year and 14 million units for next year.”

On July 14, 2008 a Reuters article states that “The fair value of the Standard and Poor’s 500, the broadest gauge of major U.S. stocks, is at 1,400, based on a 6 month to 12 month view, Abby Joseph Cohen, Goldman Sachs’ senior investment strategist, said on Monday.”

On July 21, 2008, a Barron’s cover story, “What to Bank On,” states:

“AFTER A RECORD-SETTING RALLY LAST Wednesday, the brutal selloff in financial stocks -- the worst for any major industry group since the technology bubble burst in 2000 -- could be over.

Many financial companies face additional loan losses and credit-related write-downs in the coming quarters, particularly if the economy stays weak into 2009. Yet a slew of earnings reports last week from marquee banks like Wells Fargo and JPMorgan Chase suggests that most financial companies have sufficient earning power to offset a rising tide of bad loans and should be able to absorb further write-downs without having to seek significant amounts of additional capital.”

During the summer, the problematical mortgage issues seemed to grow, with Fannie and Freddie running into financial difficulties that lead to direct government intervention.

There was continued debate throughout the summer as to whether the economy was headed into a recession.

In September, 2008 the financial crisis accelerated, with Lehman going bankrupt. The $700 billion stimulus plan to be known as TARP was unveiled and later approved. Severe stock market weakness began, with the S&P500 falling from the 1250-level in mid-month to the 850-level in early October. Also during October, many businesses saw a rapid downdraft in business conditions, causing many to abruptly downgrade their forecasts. It was in October that severe economic problems became widely apparent, pronounced, and generally acknowledged.

On October 10, 2008 President Bush gave a speech in which he said, “We are a prosperous nation with immense resources and a wide range of tools at our disposal. We’re using these tools aggressively.”

On December 11, 2008 The Wall Street Journal published a story about the latest Wall Street Journal economic forecasting survey, which stated, “The 54 economists who participate in the survey, on average, forecast quarterly contractions in gross domestic product for the current quarter and the first two periods of 2009.” Also in the story, it said, “Last week, the National Bureau of Economic Research dated the start of the recession in December 2007. That puts the downturn at 18 months, the longest period of decline since the Great Depression. The recessions of 1973-1975 and 1981-1982 both lasted 16 months.”

On 1/4/09, Janet Yellen (President and CEO, Federal Reserve Bank of San Francisco) gave a speech in which she said with regard to Federal Reserve actions: “Furthermore, many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness. There are also no clear guidelines for the Fed to gauge the appropriate size of its interventions and few precedents for the Fed to use in communicating its policy stance to the public beyond announcing new programs and describing their terms in detail.” She also stated: “Indeed, the Federal Reserve's balance sheet has already ballooned from about $900 billion at the beginning of 2008 to more than $2.2 trillion currently—and is rising.”

In the Wall Street Journal of January 7, 2009, it was reported that minutes of the Federal Reserve’s December meeting showed that “They now expect a deep contraction in the first half of the year and slow growth in the second half that won’t make up for the losses.”

Also on January 7, 2009 a Reuters story reported, “The U.S. economy is expected to contract 2.2 percent in 2009 before recovering in 2010 to grow 1.5 percent, the Congressional Budget Office said in new forecasts released on Wednesday.”

“’CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II,’ the non-partisan budget analyst for Congress said.

The CBO also forecast that unemployment rate will continue a steep climb to 8.3 percent in 2009 and 9.0 percent in 2010. With the housing crisis spreading across the country, CBO projected the average of home prices falling an additional 14 percent nationally between the third quarter of 2008 and the second quarter of 2010.”

On January 9, 2009, “The Job Impact of the American Recovery and Reinvestment Plan” was published. Among other notable items, it says on page 2, “It should be understood that all of the estimates presented in this memo are subject to significant margins of error,” as well as “Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.”

On February 9, 2009, Moody’s released “Housing in Crisis: When Will Metro Markets Recover?” with “Key Findings” including: House prices will stabilize by the end of this year; The national Case-Shiller house price index will decline by another 11% from the fourth quarter of last year for a total peak-to-trough decline of 36%.

On February 13, 2009 The Wall Street Journal published a story about the latest Wall Street Journal economic forecasting survey, based upon the 52 economists that responded. They forecast, on average, GDP growth of –1.5% in 2Q 2009; 3Q 2009 growth of .7%; and 4Q 2009 1.9%. As for unemployment, “On average, economists see the unemployment rate hitting 8.8% by December, from its current 7.6%.” Also, the survey indicated, “One area where most agreed in the February survey is the stock market. Some 68% of respondents said now is a good time to buy equities. Many said the large market correction in 2008 has presented buying opportunities, especially for long-term investors.”

On February 19, 2009, a Wall Street Journal article, “Fed Forecasts a Much Deeper Downturn,” states “The Federal Reserve sharply downgraded its outlook for the economy this year, forecasting a deeper contraction and an unemployment rate near 9% by the end of the year.” Also, the article says, “Fed officials, at their policy meeting in late January, said the economy would contract between .5% and 1.3% this year, far worse than their October projections spanning between a .2% decline and 1.1% expansion. The figures exclude the three highest and lowest forecasts of the Fed’s 16 sitting policy makers at the time. If all projections are included, the output forecast ranges from a decline of 2.5% to a gain of .2%”

On February 24, 2009, The Wall Street Journal reported that “Fed Chairman Ben Bernanke said the recession should end this year and 2010 ‘will be a year of recovery,’ if actions taken by the government lead to some stabilization in financial markets.”

As of March 13, 2009 Standard and Poor’s showed the following Operating Earnings Per Share estimates (‘Bottom Up’) for each of the indicated quarters:

1Q 2009: $13.31

2Q 2009: $15.45

3Q 2009: $17.12

4Q 2009: $17.86

As of March 13, 2009 Standard and Poor’s showed the following Operating Earnings Per Share estimates (‘Top Down’) for each of the indicated quarters:

1Q 2009: $11.72

2Q 2009: $12.57

3Q 2009: $12.54

4Q 2009: $12.19

As of March 13, 2009 Standard and Poor’s showed the following As Reported Per Share estimates (‘Top Down’) for each of the indicated quarters:

1Q 2009: $8.75

2Q 2009: $8.75

3Q 2009: $8.81

4Q 2009: $8.43

During a speech on March 13, 2009 to The Brookings Institution, Lawrence Summers commented that at current levels the stock market “may be regarded by some as the sale of the century.”

My commentary:

1/13/09

From my perspective, there are a few key issues that have to be examined with regard to periods of economic weakness. Included in these issues is the following:

Duration: How long will the weakness last?

Extent: What will the extent of the weakness be?

Expansion: How strong will the ensuing expansion be?

What will be its characteristics?

1/14/09:

If one assumes that this recession is in any way “typical,” i.e. one that lasts from 12-18 months, then by mid-2009 the recession should be over - which is what the forecasts above indicate.

Thus, if one were to believe that we are still in “typical” times, then one could be relatively optimistic, given that, historically speaking, we should be within 6 months of the end of the recession. This reliance on historical precedent may be fueling some/most of the timeframes as to the prospective recovery.

However, if we are no longer in “typical times,” – a view that I hold – the historical precedent of 12-18 month recessions may be irrelevant, or at least partially so. If this is the case, in my opinion it would signal a “structural” change in the economy that could be far more ominous and difficult to “solve” via conventional methods.