The Economist Who Predicted What Could Well Be the Next Recession

The economist and market strategist David Rosenberg took a lot of heat for predicting that the Federal Reserve’s big increase in interest rates would tip the U.S. economy into recession. “I spent most of the past year being absolutely beaten up,” he told me last week. “I had email from clients that you would not believe, and many cancellations.”

The latest economic data, including a sharp slowdown in job growth in July, is indicating that Rosenberg may well have been right all along. I asked him if he feels vindicated. “I do feel vindicated,” he said, “but I’m stopping short of running a victory lap.”

Japan’s Nikkei 225 stock index plunged Monday in the biggest one-day drop since the Black Monday crash of October 1987, with investors unnerved by a central bank rate increase last week and, now, the risk of a U.S. recession. Stocks also slumped in Europe and were off to a bad start in the United States on Monday as I was finishing this newsletter.

I’m going deep today on what Rosenberg told me last week because a) he deserves credit for focusing on troubles that others minimized, b) he’s influenced my thinking about the economy over the past several years and c) he has interesting things to say about how to act when you’re pretty sure, but not absolutely positive, that your minority opinion is correct.

Rosenberg is nicknamed Rosie, but not because he wears rose-colored glasses. He was a lonely skeptic on the U.S. economy in 2006 and 2007 also, when he was the chief North American economist for Merrill Lynch in New York. “The sales force abandoned me,” no longer sending him out to meet with Merrill’s customers, he said. As late as the summer of 2008, many other economists were still predicting the expansion would continue. That June, the Federal Reserve’s Federal Open Market Committee declared that “although downside risks to growth remain, they appear to have diminished somewhat.”

Rosenberg was vindicated that time, too, when it turned out that unbeknown to the Fed and other forecasters, a recession had already begun in December 2007, according to a December 2008 ruling by the business cycle dating committee of the National Bureau of Economic Research.