The Economy: Consensus Vs. The Lunatic Fringe

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The Wall Street Journal regularly polls 52 prominent economists and asks them their forecasts for key indicators including GDP and unemployment. The results of the most recent poll were encouraging. The average of all their estimates from the most recent survey is that the recession will end in August and that GDP will increase at least 2% next year. The same group believes that unemployment will be 9.7% by the end of this 2009, meaning the economy will lose another two million jobs in a few short months.

Averages prevent an analysis of the individual opinions of each participant.  And, averages wash out the details like a Seurat painting. Some of the economists in the Journal survey may think the recession is ending now. Others may believe that the drop in GDP will extend well into next year.

It is sometimes easier to see the terrain of how the economy is looking by examining the work of experts whose opinions are on the fringe. Professor Nouriel Roubini has been an important voice outside the traditional circle but he has repeated his warnings about the end of the economic world as we know it so often that his statements have become a self-parody.

Robert Prechter has been looking at the stock market for nearly four decades. He became well known for calling the 1987 stock market crash. His view of the markets is technical and therefore based on numbers and charts that many economists ignore. His method, the Elliott Wave theory, looks at data over very long time periods, decades at least. Prechter recently told Reuters that the S&P 500 would drop 50% below its March lows, a plunge that is unimaginable. More specifically, he told the news service “Our models are (showing) right now that it is a much bigger bear market than most people realize something along the lines of 1929-1932.” In his casual way, Prechter is saying the world is going to end.

Prechter’s reason for saying that the economy will collapse is often mentioned as a major concern by other economists. Deflation, caused by moribund business and consumer demand, drives the prices of critical goods and services lower and lower, and can set off a depression.  That, in a sentence, is Prechter’s vision.

Prechter is probably wrong, not just because the consensus view of the economy is more favorable than his is, but because central banks are willing to print money and raise rates to keep deflation at bay. If the presses break down, Prechter’s argument could be right, but the odds against him are very high.

Listening to Prechter is more valuable than looking at the consensus numbers from The Wall Street Journal, because Prechter’s figures give analysts an opportunity to say that something is false. It is harder for a consensus to be false, but it is possible to argue against a case for deflation and depression. To make the counter argument against Prechter’s opinion requires going through the factors that drive the economy item by item to find a version of the truth, a version different than one that is almost entirely dark and hopeless.

Prechter’s analysis obviously does not allow for the fact that the Fed can successfully come close to creating inflation. Perhaps even more importantly, the notion of long-term deflation means that individuals and businesses will not begin to consume again as prices of goods and services reach multi-decade lows. Corporations are doing what they can to conserve cash and individuals are cutting exposure to credit and increasing their savings. All of this capital in reserve will combine with a world where almost everything is inexpensive. Between those two things is a kindling of new demand.

August is not far off for the economists who gave The Wall Street Journal their relatively rosy opinions. The distance from GDP dropping over 6% in the last two quarters to a move up by 2% toward the end of this year is a long one. Prechter was right about the 1987 crash but even brilliant men can be outliers.

Douglas A. McIntyre