HEROES and BUMS: Economic forecasting
Dan DorfmanFinancial Columnist, Market Commentator
Posted: July 14, 2010 08:32 PM
Krugman's Dilemma: Hero Or Bum Label
When you buck conventional wisdom with a wild. contrary forecast, it's easy to wind up looking brilliant or idiotic.
That's the dilemma confronting Nobel prize-winning economist Paul Krugman, who created quite a stir a few weeks ago in economic circles with a dire forecast that we're in the early stages of a third depression. It's still the subject of a lot of buzz.
Given a number of soft spots in the U.S. economy, including high unemployment, and ongoing worries about spreading sovereign debt woes, Krugman's grim forecast won him some praise, especially fromhis fellow doomsayers.
But the ever fickle and suddenly zippier stock market, a frequent indicator of tomorrow's economic trends, is suggesting that Krugman, an Op-Ed columnist for the New York Times and professor of economics at Princeton University, is way off base.
It all raises a couple of obvious questions. Is there any substance to what Krugman is predicting? Or, is he, as some of his peers suggest, simply off the wall?
While not specifically using that phrase, Mark Vitner, a senior economist at Wells Fargo Securities, clearly indicates he concurs with such thinking. "Overly pessimistic" is how he views Krugman's forecast. "In the early stages of an economic recovery," he says, "it's always easier to see the things going wrong than the things going right."
Vitner, who believes we're in the throes of a modest economic rebound, with both housing and employment likely to show sharp improvement later this year, suggests that's what Krugman may mistakenly be guilty of doing.
Alan Blinder, a Princeton University economist and a former vice-chairman of the Federal Reserve, also thinks Krugman is off base. Further, he doubts whether we'll see a double-dip recession. "The truth," Binder recently said, "is that jobs have been growing, not shrinking." Likewise, he noted, "consumers are spending pretty normally and business investment is looking pretty good."
Economic forecasts vary, but most economists are in the same camp as Vitner and Blinder. They see a strengthening U.S. economy and are generally looking for GDP growth this year of slightly above 3% and more of the same in 2011.
That kind of anticipated economic growth, hardly China-like, but a marked improvement from where we've been during the recent recession, not only rules out another depression, but the frequently expressed concern, as well, of a double-dip recession.
In his bleak prediction, Krugman omitted detailing what his projected depression would look like. I tried contacting him for specifics, but no luck. The usually publicity-minded economist decided silence was golden and he wasn't talking.
Some economists tell me if indeed Krugman's third great depression were to come to pass, an increasingly worse economic horror story would likely unfold, perhaps characterized by such frightening events as:
--A surging unemployment rate of at least 20%, with another 15 million or so people thrown out of work.
--Another housing bust, accompanied by rapidly ballooning mortgage delinquencies and foreclosures that could easily send home prices skidding another 15% to 25%.
--A collapse in consumer spending
--Giant-sized spending cutbacks by Corporate America.
--A new wave of deflation amid falling prices.
--A slew of corporate and personal bankruptcies.
--A severe round of global economic turmoil.
--The failure of one or more major banks.
--A major stock market retreat, with equity prices tumbling back to their March 2009 lows or falling even lower.
None of the economists I talked to thought such a scenario would come to pass. I'm not surprised. On the face of it, such a recipe of economic calamity seems highly improbable, but you would be hard pressed to convince veteran investment Martin Weiss, the head of Weiss Research, a Jupiter, Fla. firm that merchandises fear, that it won't happen.
Like Krugman, he, too, sees a depression ahead, and expects more chaos in real estate, employment, banking and the stock market.
In other words, Krugman has picked up an ally, actually two them.
In a recent commentary, Weiss, who has made some excellent economic and market calls in recent years and is currently abroad, described the U.S. recovery as "toast." Likewise, he wrote, "any additional rallies in the stock market are a gift for investors--a final opportunity to sell vulnerable stocks and shift to safer havens."
Recently, the International Monetary Fund raised its 2010 economic growth targets globally and for the U.S. That cheered some market pros, but Weiss belittles the upgrades. The IMF is throwing out mixed signals and seems to be talking out of both sides of its mouth, be observes.
He's right. The IMF hedged its projected increases with the additional warning that they essentially made sense only if current conditions don't continue to persist. It further hedged by observing that "recent turbulence in financial markets--reflecting a drop in confidence about fiscal sustainability, policy responses and future growth prospects--has cast a cloud over the outlook."
Weiss also took note of what he regards as several economic dampers for the U.S., namely high levels of debt, unemployment and a continuing credit crunch.
The issue, as he sees it, is whether the next few months will bring a showdown between the world's biggest economies and the most powerful governments. The ensuing questions, he adds, are two-fold: will the governments prevent the widely feared double-dip and sovereign debt attacks at the same time? Or will they be overwhelmed by market forces that they can't control?
Weiss casts his vote for the latter. "I see possible delays and side trips in between," he says, "but I see no way governments can win the final battles against sinking economies and stock markets."
Peter Morici, a professor of economics at the University of Maryland, also holds out the danger of another depression, largely reflecting our expanding trade deficit with China, a risk, he says, President Obama refuses to address by not imposing what he believes should be a tax on dollar-yuan conversions.
Morici believes if the economy does go down a second time, it will not recover easily or quickly. Under such a scenario, he warns, the unemployment rate will rise into the teens and conditions reminiscent of the Great Depression will prevail throughout most of the nation.
How oure economy actually plays out is anybody's guess. But in the Russian roulette game of economic soothsaying, the forecaster invariably winds up as a hero or a bum. And that's Krugman's dilemma with his depression prediction. He now faces one of those labels, and the vast number of his economic bretheren think it will be the latter.
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