Area Economy Fell Harder Than Even Pessimists Guessed

By Elizabeth Razzi and Neil Irwin
Washington Post Staff Writers
Monday, February 23, 2009

Even those who most accurately predicted the course of the Washington-area economy in the Post's Local Economy Challenge 2008 failed to guess the depth of the financial drama that has unfolded.

Paul Villella, chief executive of HireStrategy, an executive-recruiting firm in Reston, was most accurate overall in predicting how the local economy would fare last year. It was his broad-based pessimism that made him the winner. Overall, Villella was second-most pessimistic of the 23 local business leaders (plus the averaged predictions of readers) who ventured a guess on how 11 key economic indicators would perform in the Post's Local Economy Challenge 2008.

Although Villella said he felt confident about the downward direction of the economy when he submitted his best guesses last February, the magnitude of the economy's descent was a surprise.

"This is an economic tsunami," he said last week. "Did I foresee that? No. What I did see are signs."

He was the most accurate forecaster on local inflation, predicting a 3.2 percent consumer price index for the region. Actual inflation came in a bit lower, at 2.5 percent. He was closest forecaster on residential building permits, under-estimating the actual count by 108 permits. The executive recruiter made good calls on local unemployment rates, coming in first on Virginia unemployment (projecting 3.9 percent rate, a bit lower than the 4.6 percent the economy actually registered), third closest on District unemployment (forecasting 6.3 percent, compared with the actual 8.4 percent) and fourth on Maryland's rate (forecasting 4.3 percent vs. 5.1 percent).

He said he based those calls about unemployment in part on the uncertainty that pervades the economy in an election year. "Any kind of uncertainty is going to lead to less decision making, and less decision making leads to less hiring," he said.

However, when it came to predicting the stock performance of local companies, Villella was among those furthest off the mark. He predicted that stock prices would climb 7.4 percent in 2008. In reality, the Washington Post-Bloomberg Regional Index fell 41 percent.

Villella explained that he based his call on his expectation that the local economy would recover in the second quarter of this year, which would have been foreshadowed by a pickup in stocks in late 2008. "The stock market is usually six months ahead, and it would anticipate that," he explained. "Boy, was I wrong."

Only Washington Post columnist Steven Pearlstein cast a gloomier forecast than did Villella. But Pearlstein's excessively dour forecast on gross regional product, which he said would rise only 1.2 percent, about half of the 2.2 percent growth actually registered, helped knock him down to fifth on the list of most accurate forecasters.

Pearlstein came in just behind the average response of readers.

"To a degree, I believe in the wisdom of crowds," Pearlstein said in response to being bested by readers. "And I like to think I had something to do with bringing the crowd to its wisdom, which was that things were likely to be a lot worse than the prevailing forecast among professional economists."

Stephen Joel Trachtenberg, president emeritus of George Washington University and a higher-education recruiting consultant for Korn/Ferry International, made the most prescient call on local stock prices, guessing that they would fall by 18.5 percent, which was still less than half their actual decline.

"I only wish I had acted on my own instinct," Trachtenberg said. "I didn't act on my own pessimism personally, but on behalf of the university, I did," he said. The latter kept more of its assets liquid, preserving cash.

"I tend to be a little conservative, and when I'm doing it for the university, I feel obliged to be a fiduciary and even more careful," he said.

The award for greatest about-face goes to 2007's most-accurate forecaster, James C. Dinegar, chief executive of the Greater Washington Board of Trade. His predictions for 2008 ranked dead last.

Dinegar attributed it to the effect of the so-called Sports Illustrated curse, which seems to doom athletes to sub-par performance after they have graced the magazine's cover.

"Now Sports Illustrated is calling it The Washington Post Local Economy Challenge curse," Dinegar said.

He explained the turnabout this way: "I am naturally optimistic and conservative, and the floor fell out. In a normal year I would have been just fine, but 2008 was not a normal year by anyone's estimate."

No one came close to calling the severity of decline that occurred in the median house price last year. Challenge participants' median prediction was $422,500, which overshot the mark by 27 percent. The actual median price of a Washington-area home was $332,700 in the third quarter of 2008, the time frame used for the contest.

April Young, United States managing director for MMV Financial, a venture-lending firm, came closest, forecasting a $400,000 home price.

"I thought we'd see a very serious decline on the outer edges of the metropolitan area," Young said. "What surprised me, and it shouldn't have, is that it was actually a lot deeper than anyone expected. Perhaps this region is not as recession-proof as those of us who think about it consider it to be."

Many Challenge participants last year took the opportunity to speculate on surprises that might come about over the course of the year. Guesses included a heaping dose of wishful thinking on contests ranging from presidential to athletic. Consider this whopper, courtesy of Jay McGonigle, chairman of Corporate Executive Board, whose overall accuracy on financial predictions trended toward the middle of the pack:

"Nats win the National League East."

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