“The Apocalypse Might Have to Be Postponed”

Posted by: Peter Coy on May 19

The anti-apocalyptic headline above appears on an op-ed piece by two economists who say the recession won’t turn out to be as bad as many fear. They’ve developed a simple economic model that does a surprisingly good job of predicting U.S. growth—and it’s predicting a decline of just 0.5% in gross domestic product in 2009. That’s much better than recent forecasts for 2009 by the Congressional Budget Office (down 2.2%), Blue Chip Economic Indicators (down 1.1%), the Federal Reserve for its stress test (down 2%), or the Organization for Economic Cooperation and Development (down 4%).

The two economists are Manfred Keil, associate professor at the Robert Day School of Economics and Finance at Claremont McKenna College in Claremont, Calif., and James Symons, an emeritus reader in economics at University College London. Despite a press release from Claremont McKenna in mid-May, their findings haven’t gotten much publicity so far. Here’s a link to the Keil-Symons study.


A bit of background: Economists try to predict the path of economic growth by looking at historical patterns. If low interest rates tended to precede strong growth in the past, then they probably will again. Most macroeconomists use lots and lots of inputs to generate their forecasts. The forecasting model of Keil and Symons is much simpler than most, requiring just six bits of current data: Federal Reserve policy; government deficits (or surpluses); the performance of household financial assets; household labor income; inflation; and unemployment.

As simple as it is, Keil and Symons say their model has done slightly better than the Congressional Budget Office’s model in forecasting economic performance in recent years. “I’m not going to claim a win but it’s an honorable draw,” says Symons in an interview from his London home.

For the economy to shrink just 0.5% in 2009, as their model predicts, there will have to be strong growth in the second half of the year to make up for a very bad first quarter and what’s shaping up to be a bad second quarter, which we’re in now. Keil and Symons don’t try to make quarterly growth predictions, though. They focus on full years—an approach that smoothes out some of the economy’s jaggedness. By way of comparison, their model predicted 1.5% growth for 2008, which was not far off from the actual growth of 1.1%.

Right now, the pluses for growth in their model are the extremely low interest rates pushed through by the Federal Reserve, and the highly stimulative deficit spending in the federal budget. The biggest minus is the poor performance of the stock market. Keil and Symons are a bit bothered by the lack of confidence expressed by consumers and businesses. They acknowledge the possibility that such gloominess could drag down the performance of the economy. But that’s not how they’re betting. Writes Keil in an email: “Many news publications believe that this [pessimistic scenario] is the case – we don’t.”

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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