Has a major economic downturn ever been widely predicted in advance?

(I say “widely predicted”. I know that a few lucky/wise/clairvoyant people managed to sell everything before the Wall Street Crash, but it did seem to catch most people on the hop.)

It seems like here in Britain we are simply waiting for the recession to arrive. House prices have fallen for the first time in fifteen years or something. Businesses are pessimistic. The economy is about to go the dogs, and everybody knows it.

Except, I don’t remember hearing this kind of thing before recessions in the past. I remember right up to, and into, the 1991/92 recession, people being desperate to buy houses “before they become unaffordable”. And before that, a similar story in the early '80s. That recession was an unpleasant surprise, not expected.

Here and now, we are still doing reasonably well economically, but everybody is confidently predicting a sharp downturn. That makes the inner Contrarian in me slightly optimistic. These things come out of the blue, don’t they? We’ve never managed to predict one before, so why now?

The bursting of the “Internet bubble” was predicted at least a year in advance. Greenspan even added a term to the lexicon: “Irrational Exuberance.”

The current bursting housing bubble was also predicted by everyone with half a brain beginning at least two years ago.

The problem, if you really want to make a killing, is knowing exactly when bad stuff will happen, not necessarily that it inevitably will.

I believe the basis for the Kennedy family fortune came from Joseph P. Kennedy’s prediction that a market crash was coming, and doing short sales & other investments based on that prediction. (Had the crash not happened, he would likely have been bankrupt.)

OK, but they were downturns in particular markets, not (yet) major economic downturns. The US economy hasn’t been in recession since 1991, and that one was mild and short-lived.

All things good and bad are always predicted. This is evident, because there’s always someone saying, “I told you so.”

The real quandary is figuring out who will get to say that next.

The National Bureau of Economic Research puts the last recession at the bursting of the internet bubble. And note from the graph, if you click the link, that employment didn’t recover for the last two “official” recessions until years after the GDP started climbing again. That’s what’s referred to as a “jobless recovery”.

You can call the last two recessions “mild” (and I might even agree), but the fact is that some portions of the population were suffering economic hardship longer than one might think just looking at the official start and end dates. This is why economists often emphasize the importance of not giving too much weight to just GDP.

Are any economic downturns (or for that matter upturns) not predicted at least in the vague sense? I know my company always is always surprised by downturns and frantically lays off all the people that would allow it to profit in the upturn, but realistically speaking, the economy is cyclic, and I doubt anyone much past grade school isn’t aware of that at some level.

Heck: predict that the economy will be good in six years, bad in twelve, good in eighteen, and so on, and you’ll probably be pretty close to correct for the rest of your life. Sure, the exact timing will change, and there are sometimes triggers that accelerate or decelerate the cycle a little bit, but it’s pretty much a sine wave.

At least in the US, the current problems are being carried by home sales, associated credit issues, and oil. People have been predicting the home sales/credit problem, with increasing accuracy, for a decade (ultimately, if the median house is out of reach of the median income, it’s going to correct, and the correction won’t end until these things are back in sync), it’s just that property investors hoped they could make money before it happened.

First off, one must separate the notion of asset prices from the notion of recession versus expansion. A recession is defined as two consecutive quarters of decline in GDP. GDP is an income measure. Asset prices, whether real (houses) or financial (stock markets), sometimes lead movement in GDP, and sometimes lag it, and sometimes have no correlation with it at all.

Movements in asset prices, tautologically and by definition, cannot be “widely predicted” in advance. If everybody believes an asset will fall in price tomorrow, it will fall today. In a free market, at any given time, the number of people who believe an asset is underpriced must balance the number of people who believe it’s overpriced–or it moves in price immediately.

Movements in GDP can somtimes be widely predicted. That’w why economists have indices of *leading indicators* which often forecast recessions:

Asset prices are one such leading indicator, since stock market and housing declines often forecast, and sometimes contribute to, recessions.

However, the correlation is far from perfect. Stock markets around the world collapsed in 1987 and no recession (at least in the United States) followed, and for all the hubbub over the Internet collapse in 2000, it’s possible that no recession would have followed in 2001 without 9/11.

One such person was Joseph kennedy. He sold all of his stocks months before the crash. Having cash in the depression made him fabulously wealthy-he was able to buy up real estate (in Chicago and NYC), for a fraction of its value. he emerged from the 30’s a billionaire-with political ambitions to match.

“Economists have correctly predicted nine of the last five recessions.”

    • Paul Samuelson

Nostradamus predicted the Great Depression; The History Channel says so.