Monday, December 31, 2007

What I forecast, not what I want 

My friend the local meteorologist Bob Weisman often uses the line "I don't make the weather, I just forecast it." Usually when I forecast the local economy -- and unlike Bob I only publish quarterly rather than daily -- I don't say it's raining. But this time I had to use a new line:

A formula showed a 39 percent chance of recession in October, according to the St. Cloud Area Quarterly Business Report, which is funded by St. Cloud State University and the St. Cloud Area Economic Development Partnership. The report was released Friday in ROI Central Minnesota magazine. ...

In the report, university economists King Banaian and Rich MacDonald use several economic indicators and a survey of business leaders to determine what the area economy looks like.

...Usually the fall survey is strong. But 84 area businesses surveyed reported the lowest fall indexes of future national business conditions and expected employment since the fall 2002 survey, when the area economy was experiencing a recession.

The area has seen recessions three times in the last 20 years. The last one persisted from May 2001 to February 2003.

The report�s authors said they expect the economy to continue weakening. In September, they encouraged business leaders to prepare for a downturn.

�We�re not walking around with sandwich boards saying �the end is near,�� Banaian said. �(But) if that signal we gave last fall was right, the worst could be yet to come.�

I wonder how many people remember what a sandwich board is?

I got a few looks from people at church yesterday to suggest I might need to tell them Bob's line. We didn't create this recession, no matter what the local real estate industry sends me for mail (just a few; others have been very candid and informative in their assessments. And our forecast does not use any direct housing market indicators at any rate.) But the graph that the first sentence uses is here:
The period before the recession in 2001-03 was like the 2004-05 numbers. We don't know there's a recession coming, but what we've said for months now is that the risk of recession is higher than anytime since that period, and that in fact we had a small "growth recession" -- a period where the economy might have expanded very slowly (if we had measures to show that) but not enough to keep unemployment from rising -- in 1995-96. I still think that is a very real possibility this time around rather than a classic two-quarter slump in production, which would put us in line with national estimates. The paucity of local data in my case means I really have no out-of-sample predictions to use to calibrate the model for recession prediction, so while I do not want to hope for a recession I admit more than the usual nervousness about whether the local one hits, particularly if there is no national recession.

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