Economists, it is said, have predicted eight of the past three recessions. So what about the latest warnings that a US double dip is imminent? Indicators galore support this conclusion but more sanguine analysts, who still represent Wall Street's consensus, accuse the glass-half-empty crowd of data-mining or ignoring other, more upbeat facts.
It is at times such as this that the Economic Cycle Research Institute, noted for its prescience, longevity and impartiality in predicting business cycles, enters the argument. Respected observers of the economy such as David Rosenberg, Albert Edwards, John Mauldin and John Hussman, all of whom burnished their credibility ahead of the last downturn, have cited a pronounced slide in the ECRI's Weekly Leading Index recently. Mr Hussman says its recent rate of change has only produced one false prediction of a recession, in 1988.
This would be quite ominous except for one thing – the ECRI itself is playing down the change in its indicator and has scolded pundits for misinterpreting its indices. All they indicate are a pronounced slowdown, typical after the initial recovery from a recession. Though the ECRI does not rule out a double dip, it deems such talk premature, even ridiculing Nobel Prize-winning economist Paul Krugman, who has predicted a “third Depression” but missed the turnround ECRI called over a year ago. One must view each argument in context. ECRI, which sells its reports, is entitled to be prickly about how its proprietary data are interpreted but it also has an incentive to be cautious in forecasting recessions. Get such a pivotal call wrong and its record looks less amazing. Similarly, economists who warned their clients of the great recession but failed to predict how spectacular the markets' rebound since March 2009 would be are perhaps prone to confirmation bias when such a storied indicator flashes red. At the moment, it is perhaps only light red but hardly the only reason to worry.