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Mystery of the Awful Economists, part 2

Posted By Barry Ritholtz On April 8, 2005 @ 7:15 am In Commodities,Economy | Comments Disabled

Last we checked, the Dismal [1] set were having quite the problem dealing with the Monthly Non-Farm Payroll Numbahs. They simply haven’t been able to get it right. We previously delved into why [2] they were having such a hard time, and came up with 10 reasons why.

My explanation: the unusual post-bubble recession/recovery was throwing their econometric models off.

Now, Tim Annett [3] of the WSJ [4] has a different take on the same group. Last Summer, the WSJ asked the Economists "Just how high would oil prices have to rise in order to tip the U.S. economy into recession?"

As of last summer, "one-third of economists who participated in The Wall
Street Journal Online’s economic forecasting survey said a recession
would follow if crude-oil stuck in between $50 and $59 a barrel –
exactly where futures prices have traded since late February.

Was that a good prediction? Well, we see GDP slowing, hiring anemic, and earnings momentum waning. The economy is hardly robust — perhaps time will prove this prediction prescient.

However, without a ravaging recession already occuring, the Economists are ready to "tear up last year’s predictions on the price level that would stifle growth:"

"In the latest forecasting survey, the economists have changed their minds. None feel that $50 oil will trigger a recession. Thirty-one percent said they feel oil would have to be sustained at $80-89 a barrel to snuff out growth, while 48% believe crude would have to top $90."

Monthly Economic Forecasting Survey: April 2005
Q&A – Oil and Recession

What price for crude oil, if sustained for a meaningful period, would tip the U.S. back into recession? 

click for larger graphic

Econ_survey_april_august [5]

Source: WSJ

My personal expectations are that $80 oil grinds the global economy to a dead halt. $50 oil merely slows it down, although it exerts enough drag to eventually cause major problems.

As we showed yesterday, [6] gasoline prices are not nearly at all time highs when adjusted for inflation. But high prices do exert a drag (even thought they are not a tax [7], as some dimwits observers would have you believe). This week’s same store numbers shows that the impact is being felt at Wal-Mart — less so at Target, whose clients are (on average) from a higher economic strata. And GM and Ford are getting crushed due to slwoing SUV sales. Think gasoline prices have anything to do with that?

Consider another factor:  Some believe its not the "absolute level of crude oil," but rather, "the rate at which it climbs." But consider the impact of:

"Sudden spikes – that are sustained – can have a big psychological effect on consumers and businesses, causing them to restrain spending. "The economy adjusts more easily to higher prices when they occur gradually," says Richard D. Rippe, chief economist at Prudential Equity Group."

To be fair, the economists may have been right this time — only a contraction may be more likely to take place in 2006 than in 2005.

No, I am not suggesting its guaranteed to occur, either then or now — its just that the percentages go up the more: 1) stimulus fades; 2) higher rates slow the real estate complex; 3) oil maintains increased prices for a longer time; and 4) the U.S. current account deficits continue.

Perhaps time will proven the Economists right. It would be ironic if they snatch defeat from the jaws of forecasting victory due to a bit of impatience . . .


A New Take on Oil and Recession [4]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-2/

URLs in this post:

[1] Dismal: http://bigpicture.typepad.com/comments/2003/11/dismal_science_.html

[2] why: http://bigpicture.typepad.com/comments/2005/03/the_mystery_of_.html

[3] Tim Annett: mailto:tim.annett@wsj.com

[4] WSJ: http://online.wsj.com/article/0,,SB111270255444198252,00.html

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/econ_survey_april_august.jpg

[6] yesterday,: http://bigpicture.typepad.com/comments/2005/04/gasoline_prices.html

[7] not a tax: http://bigpicture.typepad.com/writing/2003/10/repeat_after_me.html

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