Coronavirus crash is a true Black Swan as Goldman thought the economy was nearly recession-proof

  • Goldman Sachs analysts declared the U.S. economy all but recession proof – it wasn’t.
  • The problem with economic forecasts is that they can’t anticipate unforeseen events like the coronavirus pandemic.
  • Economists debate whether the U.S. is truly headed for a recession, but economic pain is already here.

Goldman Sachs’ economists declared the U.S. economy all but recession-proof at the dawning of 2020, but now it appears a coronavirus-induced recession may have begun just a few months later.

The analysis didn’t account for a “Black Swan,” a term for an improbable and unforeseen event. Instead, it explored the idea of a “Great Moderation,” which is characterized by low volatility, sustainable growth and muted inflation.

“Overall, the changes underlying the Great Moderation appear intact, and we see the economy as structurally less recession-prone today,” Goldman economists Jan Hatzius and David Mericle wrote.

The economy, they argued, would settle gently after 11 years of growth.

“While new risks could emerge, none of the main sources of recent recessions — oil shocks, inflationary overheating, and financial Imbalances — seem too concerning for now. As a result, the prospects for a soft landing look better than widely thought.”

All the risk assessment and economic modeling in the world is futile if it can’t anticipate the one variable that matters most — particularly if it’s a pandemic.

Pioneering economist Burton Malkiel, who is also chief investment office at Wealthfront, was also bullish on the U.S. economy as the year began. Appearing on CNBC’s “Squawk on the Street,” he said he could not spot a recession on the horizon. He also qualified his remarks by saying that predicting a recession is a very difficult task.

“My guess is, if we have a recession, what’s going to cause it is some shock that we don’t know of now,” said Malkiel, author of the 1973 book “A Random Walk Down Wall Street.”

“Some international shock,” he predicted. “It’s going to be something like that, not something we can see in the immediate future.”

Recessions are not officially declared until the economy is already deep into them, or until after they’ve passed.

Economist  Alan Blinder told CNBC’s “Squawk on the Street” on Wednesday that the U.S. was probably already in a recession as the coronavirus outbreak cancelled conferences, events and travel plans.

“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March,” said Blinder, a former Federal Reserve vice chairman who now serves as a professor at Princeton. “It wouldn’t be a bit surprising to me.”

By slight contrast, JPMorgan economists predict the U.S. will skirt the technical definition of a recession. They’re calling for negative growth in the nation’s gross domestic product, but they’re calling that a “novel-global recession” since it will only be temporary, according to their forecast. 

In January, it was easy to make bullish forecasts because stocks were setting record highs.  Coronavirus was just beginning to make headlines, and it was the furthest worry from most investor’s minds. Many economists and analysts, in fact, were expecting a slowing economy to glide to a soft landing.


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