Forecaster of the Month: Absolutely no economic reason for a recession, but ‘we’ll probably have one anyway’

Wrightson ICAP

There’s absolutely no economic or financial reason for a U.S. or global recession to occur in the next year or two, but we’re likely to experience one anyway because of political risks, says Lou Crandall, chief economist for Wrightson ICAP and the winner of MarketWatch’s Forecaster of the Month contest for August.

“Recessions are always hard to predict,” says Crandall, who’s been watching the Fed and the economy for three decades. But after looking deeply into the economic data, he concludes that “there’s no reason” for the economy to topple into recession. The usual suspects are missing. For instance, there’s no inventory overhang, nor is monetary policy too tight.

However, “political risks have a logic of their own,” he says. He’s talking about Donald Trump’s trade war, of course, but also such geopolitical risks as Brexit, North Korea, Iran, and others.

“I think we’ll continue to take risks on trade and push us over the edge,” he predicts, putting the odds of recession by the end of 2020 at slightly more than 50-50.

It’s not inevitable. “We could have a solid year” if businesses get some clarity about global trade rules, he says.

The trade war is so damaging to the economy, in part, because no one is really sure what Trump’s ultimate goals are. What would “victory” look like? Crandall says the U.S. goal ought to be forging a new relationship with China, not just reaching a “deal” about how many airplanes and soybeans they’ll buy from us.

It’s not really the level of trade with China that’s important but the terms of that trade. That’s harder to negotiate, especially if the U.S. president and his negotiators are more concerned about the levels.

To say that politics is the main risk is not to say there aren’t worries in the economy and financial system.

Some asset prices are elevated, such as leveraged loans in the nonfinancial corporate sector. But Crandall thinks the regulatory reforms, such as Dodd-Frank, have lessened the contagion effect from these kinds of imbalances. He doesn’t think leveraged loans will bring down the economy the way toxic mortgages and collateralized debt obligations brought down the economy in 2007 and ’08.

“The Fed has good reason to be somewhat confident that the regulatory reforms have been enough — that the intermediaries won’t fail,” he says.

His victory in the August contest was the fourth time Crandall has won our forecasting contest, which is designed to bring recognition to the economists who do the best job of forecasting the economic data that matter most.

While a fair amount of luck is involved in winning the monthly contest, we’ve found that, over time, some forecasters tend to do better than others. Crandall is one of them. Over the past year, Crandall is one of the 10 most accurate forecasters among the 44 we track in our contest.

For his forecasting, Crandall says that he’s less interested in getting the point estimate right than in telling his clients where the risks are.

For instance, he “arbitrarily” lowered his model’s forecast for the August payrolls that were released on Friday by 30,000 because August payroll figures have been consistently underestimated year after year by the Bureau of Labor Statistics by 50,000 to 100,000 in the initial report, only to be revised higher later.

“We compromised on a more modest initial undercount simply as a way of flagging the issue for readers,” he wrote.

That was a good call, because his estimate of 125,000 was very close to the BLS estimate of 130,000, especially compared with the MarketWatch consensus estimate of 170,000. It’s a good start for Crandall in the September contest, which covers data releases this month.

In the August contest, Crandall nailed the forecasts for three of the 10 indicators we track: the consumer price index, housing starts, and new-home sales. His forecasts on two others — the trade deficit and durable-goods orders — were among the 10 most accurate.

The runners up in the August contest were Paul Ashworth’s team at Capital Economics, Ryan Sweet of Moody’s Analytics, Spencer Staples of EconAlpha, and Lewis Alexander’s team at Nomura Securities.

The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest.

The economists in our consensus forecast are: Christophe Barraud of Market Securities, Ryan Sweet of Moody’s Analytics, Jim O’Sullivan of High Frequency Economics, Ian Shepherdson of Pantheon Macro, Michelle Girard’s team at NatWest Markets, Richard Moody of Regions Financial, Andrew Hollenhorst of Citigroup, Michael Feroli of JPMorgan Chase, Lou Crandall of Wrightson ICAP, Seth Carpenter’s team at UBS, Spencer Staples of EconAlpha, Stephen Stanley of Amherst Pierpont Securities, Ward McCarthy of Jefferies, Paul Ashworth’s team at Capital Economics, and Lewis Alexander’s team at Nomura Securities.

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