The Hazards Of Economic Forecasting
According to Bloomberg yesterday, Bank of America Corp. CEO Kenneth Lewis said at an industry conference in New York that fourth-quarter profit will be “quite disappointing.” Lewis predicted a “challenging” 2008 with higher writedowns for securities tied to the U.S. mortgage market. Jeffrey Harte, a Chicago-based analyst at Sandler O’Neill & Partners LP, told Bloomberg in an interview:
What’s disturbing is it sounds like Bank of America is becoming more bearish on the U.S. economy. Their franchise probably spans the consumer more than others, so what they say is meaningful.
Bank of America is the second-largest U.S. bank by assets, and the biggest when looking at deposits, with almost 6,000 offices across the country.
You may remember Bank of America’s Mr. Lewis from my June 21 post. At that time, I wrote:
In an interview with Bloomberg on Tuesday, Bank of America’s Chief Executive Officer Kenneth Lewis said the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to say that the housing market will begin to improve in the next month or two, forestalling a recession, according to Bloomberg. Lewis believes that job growth will lift home prices and reinvigorate construction by early 2008.
Bloomberg made a note yesterday that regarding this housing prediction, “Bank of America Corp. Chief Executive Officer Kenneth Lewis is learning the hazards of economic forecasting.”
However, to be fair, says Alex Pollock, a former president of the Federal Home Loan Bank of Chicago and resident fellow at the American Enterprise Institute in Washington, Lewis’ optimism wasn’t the exception back then. Pollock told Bloomberg:
Early in the summer, a lot of people including high-ranking Washington officials, thought it was a problem in the subprime sector that wasn’t going to spill over into other areas. Like the old saying, forecasting is easy, but forecasting correctly is the hard part.
Yet, there were those who correctly forecast that problems associated with the U.S. housing sector weren’t going away soon. I also wrote in that June 21 post:
However, as Bloomberg pointed out, Mr. Lewis’ views contradict those of other market watchers, including money manager Paul McCulley of Pimco. At a Bloomberg News panel discussion on Tuesday, McCulley insisted that, “The housing-market recession ain’t over… It’s going to be a long, protracted recession.” Some are willing to go farther than that. Mark Kiesel, executive vice president of California-based Pacific Investment Management, said in Bloomberg yesterday, “It’s a blood bath… We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.” Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York, added, “It’s not just a housing recession anymore, it looks more and more like an economic recession.” Roubini believes the chance of a recession in 2007 is at “50-50,” greater than the 33% chance former Federal Reserve Chairman Alan Greenspan was calling for back in March.
Today there are still a number of analysts saying there is no end in sight to the ongoing housing nightmare in the United States. Just this Tuesday, Fannie Mae CEO Daniel Mudd told CNBC that he didn’t expect the U.S. housing market to fully-recover until 2010.
2010? So much for a one to two month turnaround…
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