“It’s tough to make predictions”

From the Times Record Herald by Paul Krugman:

“It’s tough to make predictions”

“It’s tough to make predictions,” Yogi Berra is supposed to have said, “especially about the future.” Actually, his remark makes perfect sense to economists, who sometimes have trouble making predictions about the present. And this is one of those times.

We’re now two-thirds of the way through the fourth quarter of 2006, so you might think we’d already know how the quarter is going. Yet, economists’ assessments of the current state of the U.S. economy, never mind the future, are all over the place.

And here’s the bad news: This kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession (or vice versa). At turning points, the various indicators that usually tell us which way the economic wind is blowing often point in different directions, so that both optimists and pessimists can find data to support their position.

The last time things were this confused was early in 2001, when most economists failed to realize that the United States was sliding into recession. If that sounds ominous, it should: The bond market, which has a pretty good record of forecasting recessions, is pointing toward a serious economic slowdown next year.
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That housing boom has now gone bust. But the optimists and pessimists disagree both about how bad the bust will get and about how much damage the housing slump will do to the economy as a whole.

The optimists include Alan Greenspan, whom some accuse of letting the housing bubble get out of hand in the first place. On Tuesday, he told investors at a conference that the worst of the housing slump is over, saying that “it looks as though sales figures have stabilized.”

But the very next day the government released grim data on new home sales for October, and revised its estimates for earlier months downward. Most, though not all, of the other economic numbers that came out this week were also substantially weaker than expected.

Pessimists feel vindicated by the downbeat data. Nouriel Roubini of Roubini Global Economics, who has been forecasting a housing-led recession for some time, now believes that the economy has already stalled: He predicts zero growth for the current quarter. Economists at Deutsche Bank say the same thing.

But that’s still a minority position; most forecasters are still telling us not to worry. So whom should you listen to? And how can you avoid believing what you want to believe?