Wednesday, February 18, 2009

When Will the Economy Hit Bottom?

The average recession dating back to the 1850's has been 17 months in length. With the current recession already at 14 months in length and growing, bottom callers (i.e. the average economist) are predicting things will turn around by Q3 2009. If this occurs, then this recession is... just "average" (hard for me to believe).

On the other hand, the five worst recessions since 1850 have averaged 40 months in length. If this recession plays out in a manner more consistent with one of the worst five since 1850, look for the economy to bottom in late 2010 or early 2011.

So which is it... Q3 2009 or Q1 2011? In general, it is just one big guessing game. As the WSJ details, only one "top economist" in their 2008 survey predicted GDP would contract in 2008, so how can we expect them (or anyone) to know exactly when the economy will turn.

The bulk of prognosticators were pessimistic going into 2008, but they weren't pessimistic enough. The economy would slow, they thought, but only Mr. Hatzius thought it would contract. He also foresaw a steep increase in the unemployment rate, moderate inflation and a Federal Reserve that would be busy cutting rates.
Source: NBER