Can the Crowd Forecast a Double Dip Recession?
I am not a big fan of the Wisdom of Crowds. Not the book, which I found thought provoking, but the concept itself — its way too EMH for me.
Crowds are good at forecasting their own collective behavior. Bull and bear markets ARE crowd behavior, and markets do what they do as a result of the actions of the masses. But in forecasting elements other than their own behavior, they leave a lot to be desired. There way too many examples of the crowd flipping from “wisdom” to madness and back.
Which brings us to our question: Can the crowd forecast a double dip recession?
I doubt it. The only time we had a double dip recession in the post war era was 1980-82. Looking at the long term history of recessions, we had 3 double dips over the past 150 years. But the bigger issue is whether crowds are any good at forecasting anything outside their own behavior.
Question: When was the last time the crowd correctly forecast an ordinary recession? Given this track record, why should we believe they can forecast a double dip recession?
>
>
Hat tip Economix
Tweet
Facebook
Reddit
Digg this!
July 7th, 2010 at 8:23 am
As your friend David Rosenberg might say, this is a depression, not a recession. So the term “double-dip” misses the point.
The other major point is that we’ve reached a political logjam. Unless Obama breaks out of his timid ways, the Republicans will be successful in preventing the continuation of government stimulus which is needed to prevent the economy from falling back into recession…
~~~
BR: heh heh Is that Rosie, or Krugman ?
July 7th, 2010 at 8:32 am
While I hope there isn’t a double dip recession, I’m more interested in how the collective perception of a double dip affects collective market behavior rather than accuracy in forecasting a double dip recession.
I’m at 6′s and 7′s on the current market, though I think I should be more cash weighted.
July 7th, 2010 at 8:34 am
Have no faith in crowds. Best examples are electing W twice and Obama over Hillary.
If this post is aimed at dismissing the thought of a double dip because “the crowd” is calling for it, I think it’s based on a false premise. Among the more credible there are many more calls for a double dip or at least an open mind towards it. But, this is a very small percentage of commentators. Among the great unwashed, there is no clue beyond what Fox and CNBC tell them.
July 7th, 2010 at 8:36 am
I really can’t stand the people that believe we ever ended the recession. I stand by my call. Recession started in January 2008. The DEPRESSION began in January 2009. The numbers are manipulated. If you go in and correc the numbers, that is remove the government bias in their facts, our economy has not escaped the so-called recession. Barry, as one who I normally don’t think drinks the kool-aid, the fact that you believe any of the government figures really blows my mind. I am a credit analyst at a Major import-export company headquartered in Japan. I work in the NY office. If things move, we touch it….somewhere in the line. There is nothing going on…..NOTHING. Things have never improved since mid 2007. It is not just our company it is our competitors as well. You can take all the Government figures and throw them all away. There is no trade going on right now. PERIOD….. (and I am not talking about stock trading)
July 7th, 2010 at 8:37 am
The “real-time” GDP site http://www.consumerindexes.com/ has already shown that we are currently in a recession again (if we ever left), and with shrinking loans at banks (money supply) its a no brainer!
We do not need more government stimulus, or borrowing from the future to feed our current drug habit. We need economic cleansing which is painful but necessary, including cleansing from the current administration!
July 7th, 2010 at 8:41 am
I’d suggest the premise of the question is wrong. Is the crowd actually forecasting a double dip recession?
1). When I looked yesterday, the Bloomberg forecasts for real GDP growth were 2.5%+ for each of the next 6 quarters; that suggests the paid forecasters (warts and all) are not “forecasting” a double-dip.
2). Google Trends is useful, but all it tells you is that the number of searches (as opposed to predictions) for double dip recession has increased (vs. historically) — it does not tell you whether the absolute number is high or low (for it to be the crowd, you’d think the absolute number would have to be relatively high)
Thus is it possible that the number of searches for double dip recession has increased (absolutely, given some commentators have been talking about it. But even they disagree on what a double dip would be…some call a slowing, but still positive growth, a double dip) but is still low as an absolute number (plug in economic growth, or financial crisis, as well as double dip, to get a hint of what I’m talking about…and that’s without comparing it to a search that’s actually popular, e.g. World Cup).
July 7th, 2010 at 8:45 am
The basis of this isn’t what the professional economists are writing — they seem to be somewhat split, maybe 30/70 in favor.
This is simply using a Google search frequency to draw a conclusion about crowd psychology
July 7th, 2010 at 8:53 am
Can one predict the present?
July 7th, 2010 at 8:56 am
i concur with curbyourrisk. company balance sheets are being propped up by ‘right sizing’ (ahem) and other cost cutting measures. existing employees are being stretched out more for less pay and they’re thankful due to having a job. there’s an undercurrent that things aren’t right and they might not be again for a very long time. while the wisdom of crowds may not strongly pertain to market forecasting it does show accuracy in more sociological areas.
July 7th, 2010 at 8:58 am
At a minimum this is not your average recession (how long ago did Jamie Dimon say we were in the seventh inning while the starting pitcher was still warming up!?)
July 7th, 2010 at 8:59 am
Which crowd?
The average person is pretty smart most of the time, except when he/she thinks they can get something for nothing. Then they go stupid.
The average pundit is just selling something. They know what the paying public wants to hear and shovels it out. Anything goes as long as it’s legal.
I think if you were to ask a real average person, as opposed to a pundit posing as an average person, you would find that the recession never ended in spite of the pumped and inflated stock market (thanks to the Fed). Nobody believes government statistics as they often say things are better than they look. Sales pundits confuse the stock market with the economy because they are after commissions and they hope to convince a few idiots to get in early and stay in so the commissions don’t stop.
Generalized pundits just want something to blow hard about and will shift with the wind when it looks like a good time. They’ll forecast another recession if that’s what their readers want.
Government oriented pundits just want power and will say what it takes to attract followers. Keynes oriented pundits just want to spend OPM via the government. A pending crisis isn’t something to be wasted it if can shake loose the money tree from Uncle Stupid.
On top of that, everyone lies. Do you tell your boss the same things you tell your best friend over drinks after work? Hell no. You tell the listener who has power over you what they want to hear. You tell the listener who has something you want what they want to hear.You tell the people who can get you into trouble what they want to hear. Honesty is for relaxing with friends (unless you’re a sociopath) or have been backed into a corner. Honesty is a last resort and thus, knowing the wisdom of crowds is impossible until long after the fact.
July 7th, 2010 at 9:00 am
on a related note given the ridiculously low interest rates i decided to refinance my existing 30-year fixed 5.25% loan into the same type at 4.625% for a cost of $2500. given the amount i owe i’ll break even in month 17 and after that gravy. for those with some equity and a longer term horizon the low interest rates has to be generating some churn.
July 7th, 2010 at 9:01 am
Another leg down in a double dip recession where the dips are really big is so much like a depression that we’re really quibbling over terminology
July 7th, 2010 at 9:06 am
some things should be re-read:
curbyourrisk Says: July 7th, 2010 at 8:36 am
I really can’t stand the people that believe we ever ended the recession. I stand by my call. Recession started in January 2008. The DEPRESSION began in January 2009. The numbers are manipulated. If you go in and correc the numbers, that is remove the government bias in their facts, our economy has not escaped the so-called recession. Barry, as one who I normally don’t think drinks the kool-aid, the fact that you believe any of the government figures really blows my mind. I am a credit analyst at a Major import-export company headquartered in Japan. I work in the NY office. If things move, we touch it….somewhere in the line. There is nothing going on…..NOTHING. Things have never improved since mid 2007. It is not just our company it is our competitors as well. You can take all the Government figures and throw them all away. There is no trade going on right now. PERIOD….. (and I am not talking about stock trading)
~~
well put..
July 7th, 2010 at 9:09 am
curbyourrisk,
Really good stuff. This kind on anecdotal evidence is really hard to come by. Thanks, buddy.
July 7th, 2010 at 9:09 am
OT:
Marubeni is involved in the handling of products and provision of services in a broad range of sectors. These areas encompass importing and exporting, as well as transactions in the Japanese market, related to food, textiles, materials, pulp and paper, chemicals, energy, metals and mineral resources, transportation machinery, and includes offshore trading.
The Company’s activities also extend to power projects and infrastructure, plants and industrial machinery, real estate development and construction, and finance, logistics and information industry.
Additionally, Marubeni conducts business investment, development and management on a global level.
http://www.marubeni.com/company/data.html
July 7th, 2010 at 9:14 am
There is no one indicator. If there were, people who shouldn’t make any money would be. Worse still are the folks that think/dream that some politicians of either party can make it so. LOL.
July 7th, 2010 at 9:23 am
we don’t need a double dip to get the market deeper in the tank. ISI just slashed their 2011 GDP forecast to 2%, a rate they noted would produce a flat-to-rising unemployment rate. start printing job losses consistently and double dip or no we’re in for it.
July 7th, 2010 at 9:23 am
I played a similar game back in 2009, comparing search results for “summer rally” with those for “retest the lows.” In the late spring of 2009, there was none of the former, plenty of the latter.
My bet is that current selling is the result of some fund or fund(s) unwinding. Count me in the “weak recovery” camp.
July 7th, 2010 at 9:29 am
I don’t know about double-dip, but steel prices are maybe a leading indicator, and they are falling:
http://online.wsj.com/article/SB10001424052748704699604575343323011738364.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
~admittedly just one data point in a sea of them, but steel is one of those markets for fundamental commodities that bears close attention.
July 7th, 2010 at 9:29 am
@Barry: Fair enough.
I’d still say, that while the amount of searches for double dip has expanded a lot, it’s still a low absolute number (i.e. put in “Economic growth” or “financial crisis” into the same google trend report)…and I’m not convinced that it’s more than people searching (i.e. my non-finance friends have undoubtedly read articles/searched for double dip, but none of them is forecasting it…if pressed they’ll say, “we’ll muddle through fine”) rather than forecasting.
Additionally, behaviour-wise — even if the layman is forecasting double dip, is he changing his portfolio (raising cash, etc). I’d venture probably not….though that does mean, we’re more likely to see cascades of selling pressure should the double dip occur and the market tank.
July 7th, 2010 at 9:33 am
The wisdom of Crowds- Watching people camp out overnight 5 years ago to buy a new house.
July 7th, 2010 at 9:35 am
The Curmudgeon Says:
July 7th, 2010 at 9:29 am
I don’t know about double-dip, but steel prices are maybe a leading indicator, and they are falling:
reply:
———–
Excellent grab of fundamental information.
I recall reading about iron ore producers trying to cartel up because of jealousy over how successful the oil producers, and especially the oil derivative speculators, have been. They were said to be gaining traction too. This is especially amazing since iron is one of the most common elements available. Don’t forget about oil prices staying stable when before excess farting in Nigeria would cause a 20% spike in oil prices.
July 7th, 2010 at 9:40 am
Actually, the last time the “crowd” correctly predicted a recession was the end of 2007, when we went into recession.
“65% of Americans expect a recession, poll finds”
Providence Business News – Oct 25, 2007
http://www.pbn.com/stories/28027.html
http://www.google.com/insights/search/#q=recession&cmpt=q
It was the morons on Wall St that had it wrong.
July 7th, 2010 at 10:04 am
What double-dip? We never made it out of the first one.
I dont care what #s/ economist call it… when real unemployment is ~ 16% you are still in recession….
July 7th, 2010 at 10:10 am
Ritholtz write: “Crowds are good at forecasting their own collective behavior. ”
Since two-thirds of GDP is consumer spending, if the crowd — the great mass of consumers — is predicting a double-dip recession, the crowd is in fact forecasting its own collective behavior.
That said, like Ritholtz, I find it improbable in the extreme that your average Joe, or even your average Nobel laureate economist, is going to correctly call a turn in the economy. That’s something that has never happened before in my lifetime.
July 7th, 2010 at 10:23 am
Even my 70-year old father asked me this weekend if we were going to double-dip. Like Robert Schiller has said, we may be talking ourselves into a double-dip.
July 7th, 2010 at 10:30 am
Were any of the post WWII recessions demand side recessions? If not, comparisons don’t make a lot of sense. The oil crisis was different, but the rest seemed to be brought on by the Fed and cured by the Fed.
July 7th, 2010 at 10:32 am
Backing up my response earlier about NO TRADE taking place globally.. This from Reuters.
The Baltic Exchange’s main sea freight index .BADI, which tracks rates to ship dry commodities, fell to its lowest level in over 14 months on Wednesday as weak cargo activity continued to take its toll.
The index, which gauges the cost of shipping commodities including iron ore, cement, grain, coal and fertiliser, fell 5.12 percent, or 109 points, to 2,018 points in its 30th consecutive decline to remain at its lowest since May 5 last year when it fell below the key 2,000 point level.
A combination of slower iron ore activity, weaker coal imports into China and South America’s grains export season ending have put pressure on freight rates in recent weeks.
“Despite more incentive to buy spot iron ore, transactions are slow and most (Chinese) mills are reported to be destocking steel inventories and reducing production, putting continued downward pressure on the dry bulk freight market,” Arctic Securities said in a report.
Easing port congestion has also freed up vessels, adding a further drag on the overall dry freight market.
The Baltic’s capesize index .BACI fell percent 7.17 on Wednesday, while the panamax index .BPNI fell 5.02 percent.
More broadly, industry concerns over the pace of global economic recovery could hit shipping, given that about 90 percent of the world’s traded goods by volume are transported by sea.
July 7th, 2010 at 10:39 am
I entered the work force in 1972 in the post Vietnam, first oil shock era.
The recoveries from each recession since then has left more people on the sidelines each time, and has been more propped up by money printing as the real economy was offshored.
We have now reached the end of the recovery road.
As Unemployment Insurance runs out more erstwhile main stream families will move to the economic sideline for good and all.
As lots of others have pointed out, it takes more and more debt and money printing to get any increase in GDP at all.
This country will be an economic backwater, and the rest of the world will move on without us.
The politicians gave away our wealth and prosperity, and China and Mexico did not have to even fire a shot!
July 7th, 2010 at 11:05 am
It has been my experience that people THINK one way but ACT another. This explains so much of crowd behavior about anything one hardly knows where to begin.
My neighbor wants to refi his house from 7% to 4.5%. For months he has argued that the housing situation nationally does not impact HIS house, the market locally is at least holding steady. When the appraiser came thru with a $40,000 reduction in the value of his home from the last Refi that they did, about 5 years ago, he was outraged.
Given the vast majority of people are not reading any financial blogs, their intentional ignorance of economic issues, their seemingly limitless capacity for deniability, crowds are surely right less than half the time, a lot less.
July 7th, 2010 at 11:11 am
RE: “The only time we had a double dip recession in the post war era was 1980-82. Looking at the long term history of recessions, we had 3 double dips over the past 150 years. ”
I think that this point is very significant. There is definitely a lack of “experience” among the current generation of both “professionals” and “the crowd” with regard to both prolonged recessions and Depressions.
Although I don’t believe that The Great Depression is a great comparison to our current economic situation, it is highly notable that during that period it proved very difficult to accurately predict the duration, extent, and solutions to the economic weakness. IMHO our current economic situation is far more complex than that of The Great Depression.
July 7th, 2010 at 11:14 am
Everyone in econoblog land thinks the herd is the other guy, not them.
July 7th, 2010 at 11:20 am
For 14 years I worked in retail brokerage. That experience proved to me that the masses are great contra-indicators.
In late 1999, I approached one woman to ask if I could help her manage her retirement money. Her reply: “no, my son-in-law day trades tech stocks so he manages it for me.” I already recognized the bubble; that event simply told me we were close to the top.
As Enron was being uncovered, and every Federal regulator was beating down its door, I was inundated by people wanting to open a brokerage account with me to buy the stock. I spent one entire month on the phone talking people down and explaining why they didn’t want to buy it. It cost me dearly in income but I still slept at night.
In 2004-2005, the same indicator with real estate. People were coming into the financial institution where I worked (a large retail bank), asking lenders for loans to “flip houses.” As a healthy institution (well, before it was forced to take buy a sinking ship during TARP), the bank turned down those loan requests where the customer refused to provide proof of income. The customers mocked the lenders with “the guy down the road will lend it to me without daring to ask for my income tax returns.”
Anecdotal evidence to support Barry’s claim, “There way too many examples of the crowd flipping from “wisdom” to madness and back.”
July 7th, 2010 at 11:40 am
“The only time we had a double dip recession in the post war era was 1980-82″
so . . .therefore we must conclude that is inconceivable that it can happen now?
BR- you slay me dude- also this-
“When was the last time the crowd correctly forecast an ordinary recession”
yeah- not as good as the ECRI- they admitted the recession months after we were deep into it-
I am pretty sure folks knew things were heading south long before your beloved ECRI confirmed-
what is your point exactly? You nonsensical banter gives one the impression we have entered another golden period of prosperity and that “another” recession is simply out of the question-
have you considered (of course not) that we have not recovered at all- except for a few silly factoids that you embrace that show we have rebounded (via temporary government measures)-
better that than your own lying eyes I guess
July 7th, 2010 at 11:54 am
The Wall Street consensus is that 2011 earnings for the S&P 500 will come in at the 2007 bubble highs of roughly $95. Bet against that crowd!
And I agree with Bob_in_MA, the Main Street crowd has been more right than the Wall Street crowns for the last 3 years. Main Street has seen the sugar induced highs of the last few quarters for what they are, a short respite in a depression.
By the way, when was the first recession ever declared over in the first place?
July 7th, 2010 at 12:06 pm
Great comments in this thread!
Darmah Says:
I’m more interested in how the collective perception of a double dip affects collective market behavior rather than accuracy in forecasting a double dip recession.
Same here – I also like going back through the archives to see what the loud and angry crowd on various blogs were saying six months or a year ago. Very telling.
comet52 Says:
Everyone in econoblog land thinks the herd is the other guy, not them.
Too true!!
July 7th, 2010 at 12:43 pm
The public got the 2008-09 recession correct — remember the Phil Gram/Amity Shlaes “mental” recession?
Chalk that one up to the public knowing their own situation over the Pols an Wall St.
But that was mid-recesssion, with flate wages for a decade and weak job growth.
The question I posed up top remains unanswered: Can the public forcast a double dip recession (forecast =in advance)
~~~
Sent from the beach!
July 7th, 2010 at 1:29 pm
I am the public. I am forecasting that sometime in the future Economists will look back at our current economy and correctly label it a Depression. There was no second recession as we never fully exited the first.
What do I win Barry?
Sent from my desk at work wishing I was on the beach!
July 7th, 2010 at 1:38 pm
The prestigious pretensious award, for making a forecast and then immdeiately claiming its correct! 3X!
See the man by the front desk on the way out
July 7th, 2010 at 1:42 pm
Calculated Risk pointed out that the early 1980s was in fact not a double dip, since they are dated as two separate recessions. A double dip would mean that we don’t surpass the previous output peak before sliding back down again.
July 7th, 2010 at 2:12 pm
Don’t all people who make forecasts assume they are correct? If not….why bother making one?
July 7th, 2010 at 2:18 pm
I have always been in the “we never left the recession/depression” camp. The government bought a couple quarters “growth” spending money/assuming debt worth $12-15T. To be honest that doesn’t appear to be much bang for the buck.
In a normal business cycle I’d agree with Barry, the odds of a double dip are extremely low. I just can’t believe anybody can look at the past few years and compare it to anything normal. It’s more like Oz/Wonderland.
July 7th, 2010 at 2:56 pm
Barry,
From the data presented, it is impossible to know what “the crowd” is thinking. Both the search term “double dip recession” and its negation “not double dip recession” show up as the same on google insight. It is a very confused contrary indicator is half the people are searching for “double dip recession” and the other half are searching for “there can’t possibly be a double dip recession”
July 7th, 2010 at 5:10 pm
consider 2 assertions, one of which you made while the other you posed in question form: (1) given extant information the crowd can correctly forecast its own future valuations, imperfectly but demonstrably inferior other forecasts; and (2) the crowd can correctly forecast a recession. observations: (a) in the presence of (1), (2) is entirely immaterial, though it may be more fun to speculate on; and (b), (1) is the EMH in another garb.
July 7th, 2010 at 5:11 pm
correction: in 2nd line, change “but demonstrably” to “but not demonstrably”
July 7th, 2010 at 5:20 pm
curbyourrisk, i question if we ever left the 2001 recession. jobs never made any sort of recovery from that one.
July 7th, 2010 at 5:46 pm
[...] Internet, Markets, Media, Recession, Technology, Unemployment – Big Picture blogger Barry Ritholtz wonders if the crowd can accurately predict a double-dip recession. He reminds there have only been three [...]
July 7th, 2010 at 7:19 pm
Wisdom of crowds?
Then explain how we wind up with the elected officials that we do.
July 7th, 2010 at 7:54 pm
The US economy was in recession from Q3 1953 thru Q1 1954. Q2 1954 was a flat quarter then there was growth until Q1 1956 (-1.8%) and Q3 1956 (-0.5%). This wasn’t technically a double dip, but there were two negative quarters in three in less than two years after the recovery. There same was true later in the decade. There was a nasty recession in Q4 1957 and Q1 1958. There was a strong recovery from some quarters until a negative quarter in Q3 1959, then the downturn in Q2 1960 (-1.8%) and a big nosedive in Q4 1960 (-5.03%). These negative quarters began a year and a half after the recovery from a very nasty recession. So here are two examples of what were essentially double dip recessions. A third example is the Q4 2002 and Q1 2003 near double dip. There economy had an inventory rebuilt in early 2002 following the minor tech bubble recession, then was weakening considerably by the fall of 2002. The only reason the economy didn’t go back into recession was because of the big George Bush stimulus and the ultra-easy monetary policy which juiced the housing boom. Note that we won’t have a housing boom this time.
July 7th, 2010 at 11:25 pm
I saw this on CalculatedRisk and there’s a lot of arguments here. Kasriel has been a fine proponent of Fed induced recessions and nothing else, and that is my single favorite argument. The austrian perspective supports that, look at Hayek’s analysis on why the seventies recessions were not deeper than they were. Read Minskey.
However, this graph has a lot to offer. Take ipod references before they came out. Consider the internet and the blogoshpere. Consider that “The only time we had a double dip recession in the post war era was 1980-82″. Would we have known a double dip as defined by the term “double dip” before that? What if we get something different that is different from a double dip that does not fit any previous cycles? No opinions, I just think the risk is there. Back to CalculatedRisk, no growth feels the same as a double dip, as paraphrased by me. My mantra, who cares if we double dip? We should only care about what our current situation means today.
July 8th, 2010 at 3:02 am
[...] – Double-dip recessions and the (dubious) wisdom of crowds. [...]
July 8th, 2010 at 4:50 pm
Barry wrote: “This is simply using a Google search frequency to draw a conclusion about crowd psychology”, to which I reply: OK, but it’s a flawed methodology using an unrepresentative population since Google can’t sample all the free market economists in China.
Before some literalist flames me as has happened before on an attempt at satire, in full disclosure, this is meant to be a joke, however lame.