Beware Zombie Recession Calls

With the election behind us and the fiscal cliff approaching, recession forecasting is in full swing again, and so it's time once more to roll out the standard caveat -- not all predictions are created equal. In fact, quite a lot of the opinions are of poor quality, largely because one or more of the following applies: 1) the predictions are driven by emotion; 2) the analysis relies on cherry-picking the data; 3) the analyst is generally misreading and abusing the economic signals and models; 4) the analysis is overly focused on recent data that's probably infected with short-term/seasonal distortion; 5) the analyst has another agenda to promote that conflicts with objective macro analysis.

For example, some pundits claim that there's a clean, direct link between the business cycle and policy debates in Washington related to decisions that may or may not happen in the future. For example, Steve Forbes predicted yesterday that we will have a recession. Yes, that's a reliable forecast -- now and forever. There's always another recession lurking. Timing, however, is a complicating factor. That's a reminder that we must consider the source -- the mode l -- for any recession prediction.

Steve Forbes Speaks
On that score, Forbes' analysis looks wobbly: Raising taxes on capital, raising taxes on small businesses, which we will likely get now, particularly since the Republicans did so badly in the Senate races, that is going to pose a real burden.

Sounds plausible, in a warm and fuzzy way. But if you spend any time analyzing the business cycle, you'll quickly discover that the link between macro fluctuations and tax rates in the short-to-medium term is clear as mud. As a tool for deciding if recession risk is high or low, rising or falling, this approach is worse than useless. If it were otherwise, your first source for predicting recessions would be listening to debates in Congress and press conferences at the White House. Good luck with that.

A Better Way
Fortunately, there's a better way, although it doesn't lend itself to quotable commentary in 30-second sound bites: Analyzing and monitoring a broad set of economic and financial indicators. Aggregating and tracking the broad changes in the data is the idea behind last week's economic updates.

Meanwhile, don't let the economic porn that spews regularly from the usual suspects distract you from the necessity of a hard, objective look at the facts when it comes to business cycle analysis. There are lots of things that could go wrong (or right) in the months ahead, but there's a big risk of declaring a new recession before the data supports such a call. Ignoring the telltale signs of a new downturn is no trivial risk. But the same is true for yelling fire in the macro theater without sufficient cause. The goal is finding a reasonable compromise, and that takes hard work -- day in, day out. Some pundits would have you believe otherwise. Fortunately, that's one risk that's easily avoided.

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Written By: James Picerno