Bloomberg Economics’ “100% Recession Prediction” is a Lesson for all Investors

Here is the state of the economy on the anniversary of “Bloomberg Economics” predicting a 100% chance of a recession,

The US economy remains upbeat outside geo-political risks in Asia and the Middle East. Moreover, US growth continues to outperform most other countries. The United States’ GDP was nearly 3% in the 12 months following this headline, even as the Fed raised rates at a record pace, slowing inflation.

It was not just the failure of Fed hikes and tightening monetary policy to put the brakes on the economy; most sectors are thriving. American wages continue to rise, and spending sets records each quarter. Big ticket items such as new cars were up 20% from a year ago, and consumers pay more each month for food and drinks away from home. Americans own more equity investments than ever before.

The reshoring movement fueled by policies coming out of Washington DC has only increased. The government is investing in real American businesses and production for the first time in decades. The impact is ongoing investment in the real economy. Real growth is the story, and with an election year upcoming, the government shows no signs of slowing the spending.

If a recession is imminent, the incumbent party will spend to stimulate the economy.

There is a long history of things rarely happening when everyone in financial or commodity markets expects it.

First, people (economists, even more so) operate with a herd mentality. Once something becomes common knowledge, either greed pushes it to an extreme, or fear drives a behavior change.

Consider the dot com bubble. The best and worst companies all went to eye-watering valuations before selling off together. The companies delivering value had to differentiate themselves in the years after. Others went out of business. Buying many dot com stocks was the correct answer, but not at those prices. Ultimately, the fear of losing all one’s capital made selling the only option. It had nothing to do with the validity of the idea, product, or people. It was all wild speculation.

Second, economists and experts rely on models. Models capture what already happened. Models are not forward-looking because they cannot predict how excited the herd will become nor guess how people respond when they get scared. The economic models focused on previous rate hiking cycles rather than the lingering effects of fiscal stimulus and enormous government investment.

In hindsight, Bloomberg’s headline and the growing consensus of a recession were based on poorly applied historical data and the reinforcing behaviors of industry peers. The forecasts became more confident and louder once all the economists were certain it would happen.

It is no different than panic-buying wheat following the invasion of Ukraine. It was obvious the world would run out. The Economist ran a now-famous cover about wheat titled “The Coming Food Catastrophe.” not only did the world NOT run out, but wheat prices fell every month for over a year after. When everyone believes something, it very rarely happens.