Non-Professional Investors Predict A Recession. What’s Your Forecast?

“Think of the economy as a big exuberant dog that jumps up on people,” my father said to me long ago, “and think of the Fed as a man with a rolled up newspaper.”

The man taps the dog lightly to get it to stop jumping, but that has no effect. He taps a little harder: Still no result. “Finally,” my father said, “he gives the dog a good whack, and it slinks into the corner and lies down whimpering.”

The winners in my 21st annual Derby of Economic Forecasting Talent (DEFT) understand what my father meant. The first, second, and third-place finishers all expect a recession this year, brought on by the Federal Reserve’s campaign to raise interest rates in order to curb inflation.

The Derby

In my DEFT competition, contestants must guess six economic variables: economic growth, inflation, interest rates, the price of oil, U.S. retail sales and the unemployment rate.

The person with the most accurate guess for each variable gets three points. Second-closest gets two points and third-closest one point. In case of ties the points are pro-rated. The theoretical maximum score is 18. But no one ever comes close to that. A score of around 7 will usually win.

Thirty-one people entered last year, including a professional trader, an airline pilot, and several engineers. Few economists have entered lately, but they are always welcome.

First: Gottlieb

Paul “Bo” Gottlieb of Chesapeake, Virginia, a general contractor in commercial construction, grabbed first place this year. He racked up 7.2 points, and scored some points in four of the six categories, which doesn’t happen very often. “I think we are in for something worse than a soft landing,” he says. “I believe many suppliers are taking advantage of inflationary pressures to profiteer.”

The Fed, he believes, will keep tightening because unemployment is low and prices are still rising. “I don’t see that they have any choice,” he says. “At some point, I’m afraid this kills the goose laying the gold egg,” he says. “I hope I’m wrong.”

Second: Holzer

Ray Holzer, a recently retired manufacturing cost accountant from Jeannette, Pennsylvania, finished second, thanks mainly to being very accurate on interest rates. The vast majority of contestants didn’t foresee last year’s big increase in rates. “I think the Fed is going to have to raise the federal funds rate all the way to 6%,” he says. It stands at about 4.5% now, following seven rate hikes in 2022. The rate was only 0.07% when 2022 began.

Holzer figures the Fed will hike rates two or three more times in 2023, possibly including a 0.5% raise in March. “Everything suggests the Fed will force {the economy} into recession.”

Third: Debo

David Debo, a mechanical engineer from North Huntington, Pennsylvania, came in third. He had tied for second in the derby a year ago. Debo expects inflation to be a nagging problem. “The war in Ukraine is affecting almost everything,” he says, “and we’re still in recovery mode from Covid.” He figures inflation will run at least 5% for most of 2023, “and it may stubbornly hold in the 6’s.”

His forecast: a “mild” recession.

How to Enter

To enter the derby, answer the six questions below and send your entry to me at [email protected], or John Dorfman, Dorfman Value Investments, 101 Federal Street, Suite 1900, Boston MA 02110. Entries must be postmarked or time-stamped by midnight, March 15, 2023.

Please provide:

· Your name

· Address

· Phone (in case you win and I want to interview you, please include a weekend phone number)

· Email address

· Occupation

You aren’t required to state the reasons behind your forecasts, but I appreciate it if you do.

Here are the questions.

1. The U.S. economy grew 2.1% in 2022. How much will the gross domestic product grow or shrink in 2022?

2. Inflation ran 6.4% in 2022, down slightly from 7% in 2021. As measured by the Consumer Price Index, what will inflation be this year?

3. The interest rate on 10-year U.S. government notes rose to 3.88% in 2022 from 1.52% at the end of 2021. What will it be as of the end of 2023?

4. The price of a barrel of crude oil (West Texas Intermediate, or WTI) shot up to around $120 in the spring and summer of 2022, but ended the year little changed at $76.44. What will the oil price be on Dec. 31, 2023?

5. U.S. retail sales (including food) totaled $748.24 billion in December of 2022. What will they be in December 2023?

6. Unemployment fell in both 2021 and 2022, ending last year at 3.5%. What will the unemployment rate be as of December 2022?

The winner of the derby will receive a plaque, trophy or engraved clock. Good luck to all.