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Has the Fed ever (accurately) predicted a recession? - Peter Diekmeyer

Has the Fed ever (accurately) predicted a recession?  - Peter Diekmeyer
By Peter Diekmeyer 3 years ago 15564 Views 5 comments

Peter Diekmeyer is a freelance business/economics/defence/IR writer, with 15+ years of experience. Regular clients include the National Post, Canadian Defence Review, Grocery Business, and many financial sector blogs and economics sites.

Peter has also written speeches for dozens of the country's top CEOs, Ministers and NGO leaders. Other niche areas include financial/technology white papers and French to English translations.



December 1, 2015

In a recent survey not a single major central bank could provide an example of an accurate “a priori” recession forecast. The silence from the Federal Reserve, European Central Bank, BOE, BOJ and the Bank of Canada is deafening.

Precious metals investors rely heavily on economic projections when deciding where to put their money. But there’s something fishy in the land of mainstream forecasting. The US economy is now in its seventh year of recovery; however, Fed officials project growth as far ahead as the eye can see.

The Fed isn’t alone. Despite the fact that the US economy contracts for two consecutive quarters every six or seven years and is on schedule to do so again soon, not a single major central bank is forecasting a US recession as its baseline scenario. Why is that?

A miserable forecasting record

The Fed’s lousy forecasting record is well known. The US central bank completely missed predicting the 2008–2009 financial crisis and ensuing recession. Worse, it has consistently issued over-optimistic projections since then. Less well known is the fact that the US central bank appears to have never accurately forecast a recession before the country was already in one.

Two weeks ago I surveyed five major central banks, and not a single one could provide an example of an accurate “a priori” recession forecast. The silence from the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Bank of Canada was deafening.

Signs of a slowdown abound

The lousy forecasting records of major banks is of particular concern these days because signs of imminent trouble are everywhere. According to the Bank for International Settlements global personal, business and government debt has risen by more than 40% since the 2008 recession. Central banks have been printing money at their fastest pace since the Weimar Republic. The S&P 500 index continues to flirt with record highs.

Trade barriers, which caused immense damage during the Great Depression, are popping up everywhere, a sign of worse things to come. These include “Buy America” and other similar policies, as well as investment and capital flow restrictions.

For example, the office of Jeff Sessions, a US senator, printed out a copy of the recently signed Trans Pacific Partnership Agreement. The 5,544-page document stood over two feet tall. The TPP is so filled with fine print that even its writers didn’t use the words “free trade” in its title. “Managed trade” (by bureaucrats) would be a better term.

Consulting a range of opinions

According to one of Canada’s top economists, who I spoke to at a recent symposium held by the Association of Quebec Economists, governments worry that if central banks issue a recession forecast, businesses and consumers will pare back their investing and purchasing; this alone could cause a recession even if one weren’t already on the way. Large financial institutions have similar worries. If they predict a recession, their borrowing business will drop.

There is a good argument to be made that the more independent the forecaster, the better they are able to “call a spade a spade.” For example, Glen Hodgson of the Conference Board of Canada (a mainstream organization, but one that is outside the financial sector) was one of the first economists to suggest that Alberta had entered its most recent recession.

In short, if precious metals investors are relying on central bank forecasts to guide their investment decisions, they may be in for a rude surprise. By the time the Fed “projects” the next recession, there is a good chance that the US economy will already be in one.

Maurice Vachon 3 years ago at 9:06 AM
Interesting piece. But you did not far enough. As Ian Gordon at Longwave Group has been saying for years, the motives of almost all mainstream economists are in question, as the institutions they represent all have an interest in portraying Rosy Scenarios.

Bank economists, like you said, need to forecast cheery economies so their customers will borrow.

Retail economists: and business economists in general, need to portray good conditions because they want customers to buy.

Governments want Rosy Scenarios for the same reason as central banks, because if they predict good times, it creates a virtuous circle. And if they predict bad times, it will do the opposite.

The IMF and World Bank, have the same motives as the governments that control them and are thus almost always optimistic.

In fact, if you really think about it, its very hard to find a good independent economic forecaster anywhere.

Hey, I just got a great business idea!
Sam Klemmons 3 years ago at 8:14 AM
You are calling the Conference Board "independent?" That's a bit of a joke.....
Peter Diekmeyer 3 years ago at 7:29 AM
Quick follow-up to my survey of the five central banks, to see if they could produce one example of a recession forecast, that had ever successfully made.

Close to three weeks after my initial contact, one of the numerous Federal Reserve Departments that I sent the request to (including public affairs) finally replied:

*****

Dear Mr. Diekmeyer:

Thank you for your recent correspondence in which you requested a copy of a forecast in which the Federal Reserve's economics team "has accurately predicted a recession at least six months in advance" or provide a comment as to why central banks do not forecast recessions.

Please direct your inquiry to the Board's Public Affairs Office at 202-452-3204.

Sincerely,
Board Staff


*****

At least the Fed and the Bank of Canada (which said they would get back to me but never did) acknowledged the request. The other central banks (BOJ, BOE and EDB) never even did that.
B. Nobalia 3 years ago at 8:10 AM
One last thing: it looks like Larry Summers agrees. I just noticed that in his most recent column he writes:

"No postwar recession has been predicted a year in advance by the Fed, the White House or the consensus forecast....."

https://www.washingtonpost.com/opinions/preparing-for-the-next-recession...
dave 2 years ago at 2:41 PM
Could you provide the recent survey data or where that came from?
BitcoinCash

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