You Decide: Can we predict turning points?

Published 6:01 am Friday, October 4, 2019

By Dr. Mike Walden

I make about 70 presentations each year all around North Carolina. I speak to a variety of groups and organizations, and my audiences range from a dozen to over 500. The largest group I even spoke to totaled 1,200 folks.

My typical speech begins with describing the current condition of the economy and how we arrived there. Since I’ve done this for over four decades, I know what people really want to hear.  They want to know where the economy is going. That is, they want to hear my economic predictions.

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I understand this. Even though I find it interesting to analyze today’s economy and put it in historical perspective, most people will “tolerate” listening to an economist if they can derive some useful information. Such as, where interest rates and the stock market are headed, what jobs will expand, whether home prices will rise or fall, what communities will be the best places to live and – the big question today – whether a recession is around the corner.

Here’s a not-so-secret secret. The easiest way to make predictions is to simply follow existing trends. For example, if the economy expanded this year, then predict the economy will also expand next year. Sure, the forecaster can make the exact numerical prediction slightly different than this year, but the point is to continue the trend.

The hardest forecast to make is one that breaks the trend. I call breaking the trend a turning point.  Again, let’s use economic growth as an example. A turning point forecast is one which says, although the economy grew this year, next year the economy will contract – that is, there will be a recession. The economy moves from a positive growth rate to a negative growth rate.

What makes turning point forecasts so difficult is they require forecasters to go against the grain. They require forecasters to believe behavior will change, meaning people and businesses will behave differently next year compared to this year.

The best recent example of a turning point is the Great Recession of 2007-2009. With the benefit of hindsight we know the Great Recession was sparked by over-investment in real estate. The key behavioral change was investors moving from being optimistic about real estate prices to being pessimistic. Very few economists and policymakers (including two chairmen of the Federal Reserve) anticipated this change coming.

Some economists think there’s another turning point occurring today, but it’s a beneficial one.  One factor that can spark a recession is an oversupply of inventories. To correct the imbalance, businesses will reduce buying new supplies, thereby causing suppliers to cut back on their production and workforce. Higher unemployment exacerbates the trends, eventually causing a recession.

Today’s turning point is the use of technology to better manage inventories through improved forecasting of consumer buying and implementation of “just-in-time” production. While maybe not eliminating the possibilities of future recessions, many think this turning point could keep them mild.

There may be other turning points affecting forecasts for individual sectors of the economy. Growing states like North Carolina are challenged to expand our transportation infrastructure to keep driving times and congestion from reaching unacceptable levels. Some futurists think ride-sharing, rides on demand, autonomous vehicles, drone delivery of products, internet delivery of services and the increased ability to work from home could substantially reduce commuting and the need for more roads and rails – exactly the opposite of long-term forecasts.

Many big cities in the country, including those in North Carolina, are experiencing rapid increases in housing costs as the growth in population and businesses heats up the competition for accessible land.

Yet what if a two-pronged turning point intervention happened. The first prong is the high housing prices in the cities motivating households to look for more affordability in the suburbs, exurbs and rural areas. The second prong are those innovations – drone deliveries, internet connections, rides on demand and working from home – that make living away from city centers possible. Urbanization could be replaced by lower density living.

The rising cost of healthcare has been a top issue in our country for decades. Standard forecasts show health care costs continuing to rise and taking a larger and larger share of our spending.

What if this trend could be turned around by new medical technology? Many experts think it could happen. Body monitoring that alerts physicians of problems before expensive surgery is needed, remote delivery of medications and treatments and expansion of out-patient operations that avoids the expenses of hospital stays are all methods that could bend the health care cost curve down in the future.

The longer I’ve been a professional economist, the more I’ve become aware of how turning point can alter forecasts. It’s a big reason why I always include with my predictions a heavy dose of humility.

So does the past predict the future? The best answer I can give is, yes, but I don’t know by how much. You decide what your answer is.

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.