Jamuary 6, 2000

Market Analyst Concedes Recession Forecast Wrong

Economist Now Predicts Growth in 2000

By JONATHAN FUERBRINGER

It is best to offer regrets quickly and keep them short, and that is what Edward Yardeni did this week.

Mr. Yardeni, the chief economist at Deutsche Bank Securities, had predicted that Year 2000 computer problems would cause a recession this year by disrupting global supply chains, collapsing earnings expectations for thousands of companies and popping the stock market bubble.

Now that the new year has arrived without notable computer flaws, he has junked that forecast.

In a short note posted on his World Wide Web site Tuesday, Mr. Yardeni said, "I concede that I was wrong about a Y2K global downturn." And, in an interview yesterday, he said he was joining the consensus crowd with a forecast of robust economic growth this year.

Though he made headlines with his Year 2000 forecast, Mr. Yardeni was criticized by his rivals, some of whom dismissed his prediction as absurd. But they also noted that on Wall Street one of the sure ways to sell your views is to move to the extreme, which Mr. Yardeni surely did.

Mr. Yardeni said he wished he had listened to the people, even as recently as November, who said that the dawn of the new millennium would be uneventful where computers were concerned.

"My regret is that there were some pretty credible people out there saying that there wasn't going to be a problem," he said.

He blamed himself for being too focused on Year 2000 problems. "I think I was too close to the issue," he said. "I was focusing on the weak links. What I failed to do was to realize there were fewer and fewer of them."

For example, he said his own November poll of the information technology workers who were fixing the computer systems showed that some 90 percent were optimistic about the outlook. But Mr. Yardeni said that he put more weight on the answer to another question: when those workers rewriting programs would finish their work. Fifty-six percent said that they would need the last three months of the year to finish, up from 43 percent in September and just 16 percent in June.

"That swayed me," he said, as did reports from foreign ministries and the State Department that said countries like Russia, China and Italy, still faced problems.

Mr. Yardeni, who has not finished the revision of his economic forecast for this year, could provide only an outline. He said he was going to join the consensus with a forecast of a 3.5 percent to 4 percent rise in the gross domestic product. He said he would be below the consensus on inflation, predicting a 1 percent to 1.5 percent rise in the Consumer Price Index.

Until the turn of the new year, Mr. Yardeni had forecast three quarters of decline for the year, which would be a recession. His old forecast had declines at an annual rate in the gross domestic product, after adjustment for inflation, of 4.5 percent in the first quarter, 3 percent in the second, 1 percent in the third and a rise of 2.5 percent in the fourth quarter.

That performance would have produced a decline in average growth for this year of one-tenth of 1 percent compared with 1999, well below the 3.5 percent to 4 percent growth he is now forecasting. The reason the annual decline is so much smaller than the quarterly figures in the old forecast is that they are calculated at an annual rate for one quarter but do not continue for the whole year.

Does he regret having made the forecast? "Looking back," he said in his Web site note, "I don't regret my efforts to raise awareness. I believe that Y2K was a big problem. Hopefully, in the next few weeks we will find that it has been mostly fixed."

He did acknowledge, however, that his bad forecast could hurt him. "It currently does," he said.

"I think investors I deal with know that I think a lot outside the box and that can lead to some good forecasts," he said. "This one was a crummy one."

But, he added, "on Wall Street, we rarely look back."

[ENDS]

-- John Whitley (jwhitley@inforamp.net), January 07, 2000

Answers

We've gone through 6 days since the roll-over. Yardeni's last report (approx. Dec. 20) stated how a slow degradation of Just In Time inventories would lead to a recession. How & why does he change his tune after 4 business days? He appeared on CNN's Moneyline after the NASDAQ took a s**t kicking on Tuesday saying he was wrong (no mention of a 30% cahnce of a recession - I guess that's not for the day-traders watching CNN - only serious NY Times readers). Methinks they doth protest too much!

-- Think It (Through@Pollies.Duh), January 07, 2000.

It's really very simple.

Assume that, say 5% of Y2K problems manifest themselves during the rollover.

Assume that--and we're being _very_ cautious here--only another 5% of Y2K problems were found BEFORE the rollover. And I remind you that all those accounting packages, management packages, etc., have been rolling into FY 2000 since April. The US Governemnt, who owns more old, fragile code than anyone else, has been in the year 2000 since October. (I know. I remediated one of their systems.)

So, only a small fraction--10%--of Y2K problems have been seen by 01/01/00. Fine.

Multiply every problem to date by ten.

Hell, don't even spread that out over the course of the year. Multiply all the problems seen to date by ten, and assume they all hit us in January.

That won't disrupt supply chains. That won't bring down power, or telcom, or banking.

It won't do much besides drive up sales of Advil to corporate IT staff.

That's why Yardeni could say what he said.

It is over, folks. I don't mean that there will never, ever be another Y2K bug. I don't mean that there won't be some headaches. But bugs and headaches--I challenge any professional programmer to refute me--are just business as usual. There is no more threat to our way of life, our grocery store shelves, or our economy from Y2K.

(And I certainly don't poo-poo the idea of a recession in 2000. We're in a terribly overheated economy, with a stock market bubble ripe to pop. I'm just saying that Y2K isn't the needle that's going to pop it. Predicting a recession can be like predicting rain: if you just wait long enough, it will happen, sooner or later. But the grounds for a causal relationship with Y2K have all but evaporated.)

Craig

-- Craig Kenneth Bryant (ckbryant@mindspring.com), January 07, 2000.