That WSJ article has so many errors, it would take me 30 minutes to address them all. I’ll tackle just the first error in paragraph 1, that the worst is over. Housing starts are dropping at a greater percentage every month, and there is no indication that trend is reversing. Next, the OFHEO index tracks the NAR resales very closely, so Calculated Risk (and I) expect the OFHEO Q3 index (to be released in about one week) to be a very sharp drop. I used to have fun debunking other people’s arguments, but it’s not so much fun anymore and it’s time consuming.
Finally, whenever I read anything that economists say, I basically ignore it, because they are lousy forecasters.
Roubini: “in March 2001 in a survey 95% of US economic forecasters predicted that there would not be a recession in 2001; 95% of them! Too bad that the recession had already started exactly in March of that year!. So, even as late as March of 2001 when it was totally obvious that the economy was spinning into a recession 96% of all forecasters were still living in the delusional dream that the US would avoid a recession. This even after the tech and investment bubble had totally busted in 2000; even after the 2000 Chrismas sales were a disaster and growth was already crawling down to zero by the end of 2000; this even after the Fed went into a panic mode on January 2nd 2001 and cut the Fed Funds rate in between FOMC meetings because of the collapse of Chrismas sales and the collapse of the NASDAQ that day
was clearly signaling a coming recession. There was systematic delusional bullish bias among forecasters, among investors and in the Fed.
The failure of professional forecasters in predicting recessions – there are always way overoptimistic and systematically miss the turn downward of the business cycle – is well known and documented in scholarly studies. Prakash
Loungani – who has written several research papers on this systematic bias – summarized the results of his 2001 paper on this forecasting bias with the following scathing remarks: “The record of failure to predict recessions is
virtually unblemished”. That sums it all. Why this ystematic failure? Because there are systematic biases and financial conflicts of interests in the economic forecasting business.””
