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‘A fool’s game’: 4 economists break down what it’s like forecasting the worst downturn since the Great Recession


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‘A fool’s game’: 4 economists break down what it’s like forecasting the worst downturn since the Great Recession

‘A fool’s game’: 4 economists break down what it’s like forecasting the worst downturn since the Great Recession
  • A number of economic indicators including retail sales, consumer sentiment, and more have posted record drops amid the coronavirus pandemic, while weekly jobless claims have soared.
  • For economists attempting to forecast economic pain, huge changes in numbers make predictions difficult. 
  • For example, in the week ending March 14, jobless claims increased to 281,000. The next week, claims jumped to 3.3 million, and just one more week later, hit an all-time of 6.9 million. 
  • “We have to acknowledge that our models really aren’t built for this,” Michael Gapen, chief US economist at Barclays, told Business Insider.
  • Visit Business Insider’s homepage for more stories.

The coronavirus pandemic has swiftly precipitated one of the worst economic downturns in US history. 

For economists tracking indicators of what’s happening in the US economy, forecasting an unprecedented situation has been difficult.

“My outlook right now is that I don’t even have an outlook,” Martha Gimbel, an economist at Schmidt Futures, told Business Insider. “This is so bad and so unprecedented that any attempt to forecast what’s going to happen here is just a fool’s game.” 

The number of economic indicators that have hit records in the last month is staggering. Retail sales, consumer sentiment, industrial production, and home sales have all slumped as most of the US remains under lockdown to curb the spread of COVID-19.

But perhaps the most telling sign of the economic damage from the coronavirus pandemic is the weekly jobless rate, which has ballooned to 26 million unemployed Americans in just over a month. 

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The rapid loss of jobs has been so severe that in just four weeks, unemployment due to the coronavirus crisis roughly equaled all of the jobs created in the period since the Great Recession — the longest-ever economic expansion on record. Since March, each weekly unemployment insurance report released reflected figures far above the worst week of the Great Recession, when Americans filed 665,000 claims. 

Overwhelmed models

In addition, the onset of millions of claims being filed per week was rapid. In the week ending March 14, unemployment-insurance claims jumped to 281,000, then a two-year high. The next week, claims jumped to 3.3 million, and just one more week later, they hit an all-time of 6.9 million. 

“We have to acknowledge that our models really aren’t built for this,” Michael Gapen, chief economist at Barclays, told Business Insider. “Most of our models are linear, so they’re good for small deviations within the normal space,” he explained. 

For the last 50 years or so, the normal space for weekly jobless claims has been between 200,000 and 700,000, he said. But when the weekly number suddenly jumps to 6 million, “I’m not sure you have a model that tells you anything about the state of the world that you’re in,” said Gapen. 

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To attempt to forecast where jobless claims will be in the next week, economists have resorted to different methods, which sometimes feel like “finger to the wind” or “back of the envelope” calculations, Gapen said. 

New ways of forecasting

Some economists have started relying more heavily on Google trends, for example, to gauge claim filings by seeing how many people searched for terms such as “how to apply for unemployment” or “unemployment benefits” in each state.

Early on, when the coronavirus crisis first hit, economists looked to reports from individual states showing huge spikes in applications from unemployment benefits, before the Trump administration asked states to not release such numbers before the official weekly reports.

US gross domestic product estimates have also been used to project what may happen with job losses, Heidi Shierholz, a senior economist at the Economic Policy Institute, told Business Insider. 

In early April, Goldman Sachs estimated that US GDP would contract 34% in the second quarter. That would roughly translate to 19.8 million jobs lost by July, and an unemployment rate of about 14%, according to the EPI. 

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But other major firms have pushed US GDP estimates even further — JPMorgan expects a 40% contraction in the second quarter, which could put the jobless number closer to 30 million. 

“As their forecasts have deteriorated, our jobs numbers have deteriorated,” said Shierholz. “I wonder if it makes us look weird,” she said. “But that’s what we’re doing, and that’s where it is now.” 

Working from home 

Economists are also dealing with the same shift facing the majority of Americans — working from home, away from the usual office spaces and closer to family. 

That means there are may be small children around during the day. And for some, like Gapen, it means not being in close proximity to a trading floor, where he could hear and see what was happening in markets very easily. 

“Being in proximity to markets made me a better economist,” Gapen said, adding that “it’s impossible to be as dialed-in as we were when we were sitting on the trading floor.”

Still, he’s thinking about the big picture. “I’m not unemployed and I’m not complaining,” he said. 

They’re also grappling with the medical side of the coronavirus crisis, and the constant stream of information coming out about it. 

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“I have spent a lot more time hearing about and thinking about the medical side of this,” Jason Thomas, chief economist at AssetMark, told Business Insider. “I’ve been more frustrated with the medical side, the guidance,” he said. 

Still, he added that there is “justified optimism” about the situation. “I have no doubt we’re going to get this figured out, and that we’re going to get a vaccine that’s probably going to come earlier than anybody expects,” he said. 

Unique and unprecedented

The coronavirus pandemic and ensuing economic fallout has been a sharp surprise for Americans, economists included. While the possibility of a pandemic is not new — the US went through SARS, swine flu, and Ebola — the reality of the coronavirus outbreak has been unique because of the economic shutdown it’s caused. 

That makes it difficult to forecast what might happen — there’s nothing to compare it with that’s a helpful guideline. 

“I come at this with a huge amount of humility as anyone should,” said Shierholz. “These numbers have been a moving target.” 

It’s now more than a month since the first big jump in unemployment claims showed just how bad the economic situation due to the coronavirus was, and it’s continued to deteriorate since. Now, everyone wants to know just how long the economic pain might last, and what kind of eventual recovery could happen in the US. 

But even that is hard to predict, as seen in the litany of letters and other shapes being used to describe what a recovery might look like. 

“Everyone wants the answer,” said Gimbel. “Everyone wants to know exactly how bad it is and exactly how bad it’s going to get. And that’s just almost impossible to tell right now.”

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More:

Economy
Jobless Claims
Unemployment
Unemployment Rate


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