Dr. Rick Franza, Dean of the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he talks about what to believe about gloom and doom economic predictions. The interview has been edited for clarity and impact.
ABD: Lately a lot of gloom and doom economic predictions have been circulating. What can we or should we believe about them?
Rick: I’ve seen guys predicting gloom and doom for the last five years. Eventually, they’ll get it right. Even the guys who predicted the Cubs to win the World Series got it right one year.
Some of these people who make certain projections, if they can get people to believe it, they can make money off it. The problem with people who say, “This will happen” is that they’re full of crap. If they were honest, they’d say, “I believe this is the most probable scenario.”
ABD: Does that mean we aren’t heading for some bad economic times?
Rick: We’re in an unprecedented time. Often, economic indicators follow an expected course, but this time it’s an anomaly. Could there be something worse than a recession, as one expert predicted? It’s definitely plausible. Depending on the industry, your job could be at risk.
But I think predicting gloom and doom is a little too much.
ABD: Given all the news that we’re subjected to daily from email, social media, and television, what are some sources to gain some useful information?
Rick: I’d stay away from the ‘popular press.’ Look at places like the Wall Street Journal, Barron’s, and Fortune. You don’t have to read the stock market reports. Read what they have to say about the supply chain, consumer sentiment, and issues that affect the economy.
ABD: How can we evaluate the information and form a plan of action for a recession or worse?
Rick: Don’t look at the best-case projections and worst-case projections and try to average them. The average is never right. Instead, look at it in scenarios. Some financial firms put their scenarios in a ‘bucket’ and evaluate the percentage chances of that scenario happening.
For example, one financial firm I follow evaluated the equity market for June 2023 with four possible scenarios. Their base case of the market being slightly higher was given a 50 percent probability. Their best case was given a 20 percent probability. Their two worst-case scenarios were given 20 percent and 10 percent probabilities.
That was specifically about the equity market, but it’s important to understand what the different economic scenarios are so that you can position yourself based on your risk tolerance.
ABD: It seems that a lot of planning for an economic downturn is just common sense – evaluating expenses and putting money aside for the unexpected.
Rick: That’s for sure. A lot of people don’t save for retirement, but they don’t save, period. A ‘rainy day’ fund is something everyone should have. You want to be prepared for unexpected expenses or a temporary loss of wages.
ABD: The Fed keeps raising its prime rates, which is supposed to start bringing inflation under control. Will that work?
Rick: I think it will. One thing you get from reduced inflation is predictability. For example, if a football coach has a kicker who makes everything from inside the 40-yard line, but he doesn’t have the leg strength to make anything past that, his decision making to try for a field goal or not is predictable. He knows what to expect. If inflation is under control, we get cost certainty and that’s valuable. It lets us know what to expect.
ABD: One of the reasons we have this 40-year-high inflation is that the Federal government kept shoving ‘free’ money into the economy through various programs during covid. As people face tough economic times, will there be the temptation for the government to do that again and compound the problem?
Rick: It’s a risky business and it’s all a delicate balance. But if they start doling out money again they’re going to have to raise taxes, but if more people are out of work, they’ll lose their tax base. The government is running out of magic bullets.
