Beware Misleading Recession Forecasts—But Be Prepared

People are worrying about recession with good reason: inflation is up, interest rates are rising and the Ukraine war hurts the global economy. But the scary headlines reflect some misleading reports. Yes, there is significant risk, but not as much as some reports, and not as immediately.

Some economists always predict doom and gloom. When a recession comes, they point to their accurate forecast, ignoring the many times they cried wolf. But today more mainstream economists are worried. Business leaders should take notice, but some of the press reports are not to be believed.

Fortune Magazine, a usually reliable source, wrote, “A poll from Reuters, conducted between April 4 and 8, found that one in four economists believe the U.S. will experience a recession this year, with that number rising to 40% over the next 24 months.” This article is hugely misleading. What the Reuters piece actually said was “Indeed, respondents to an additional question gave a median one-in-four chance of a U.S. recession in the coming year, rising to 40% over the next 24 months.”

To be clear, if a group of economists is each asked to estimate the risk of recession, and the average (or median) answer is 25%, it’s quite possible no single economists believes the risk is above 50-50.

The Wall Street Journal provides enough underlying detail to clarify a similar bogus claim in the Fortune article: “And economists surveyed by the Wall Street Journal this month were even more pessimistic. A whopping 28% said they are predicting the U.S. economy will fall into a recession sometime in the next 12 months, up from just 13% a year ago.”

What the Wall Street Journal really asked was what is the probability that the U.S. economy will be in recession in the next 12 months. The average response was 28% probability that we’ll be in recession anytime in the next 12 months. How many of those economists actually think a recession is more likely than not? Three out of 58 respondents thought the probability was above 50%, which is about five percent. Another three economists put the probability of recession right at 50%. The most pessimistic (Alfredo A. Romero of North Carolina A&T State University) pegged the risk at 75%, which is pretty high but far from a certainty.

Moving to the more accurate reports, “The Fed Has Made a U.S. Recession Inevitable,” according to the headline of an article by former New York Federal Reserve president Bill Dudley. He actually said that avoiding a recession was technically possible but highly unlikely. So “inevitable” is close to his position, but not exactly his view. Timing of the next recession goes unmentioned in Dudley’s article.

Larry Summers, and economist, former Treasury Secretary and former Harvard President also predicts a “major recession” without specifying the timing.

Investors are in the same ballpark as economists, according to a Markets Live poll conducted by Bloomberg. with 15% expecting recession to begin in 2022, 48% in 2023, 21% in 2024, and 16% looking at 2025 or later.

My view was captured in the Forbes headline: Economic Forecast 2022 And Beyond: Good Now, Scary Later. The United States economy has a huge amount of stimulus still working its way through the system, with pent-up demand for many goods. That argues against a 2022 recession, though a recession beginning in late 2023 or in 2024 has much higher probability.

The timing of the next recession is critical because a business that hunkers down too soon will miss opportunities to strengthen its capital position through strong sales and earnings. Of course, delaying a shift to recession mode can be disastrous. With so much riding on the timing of recession, relying on frightening but statistically illiterate articles is dangerous.

The best course for a business leader is to keep a skeptical attitude about forecasters—even of my forecasts—and a humble attitude towards the leader’s own views. Economists have often erred in their forecasts, but you are probably not any better. So develop contingency plans for a recession right now. Review them annually. Monitor the economic issues most important to your business. Glance at GDP but focus on consumer spending, or housing starts, or business capital spending orders—whatever part of the economy moves the needle at your business.

The U.S. economy is certainly going to have a recession, but that statement does not imply it will begin this year, or next, or even the year after. But we will have a recession, and every organization should be prepared for it.