Odds of a Double-Dip Recession
MacroAdvisors goes out on a limb to make the call that the “Chances of a “Double-Dip” are Essentially Nil.”
They do so based on a recession probability model:
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The probability is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production. (And the latter is estimated as a function of the term slope, stock prices, credit spreads, bank lending conditions, oil prices, and the unemployment rate).
Media commentary is leading in the pro-double dip camp:
• Bloomberg.com – Video: Shiller Sees `Significant’ Double-Dip Recession Chance
• NPR.com – Several factors point to double-dip recession
Former Labor Secretary Robert Reich explains why there’s not enough oomph in our current economic situation to promote a recovery.
Reich also says the economic boosters we currently rely on are running out: 75 percent of stimulus has been spent and the Fed is worried that zero interest rates will cause more inflation down the road. Some economy-watchers were hoping U.S. exports would give recovery a boost, but with uncertainties in Europe promoting the dollar as a safe haven, exports have become more expensive. Despite recent positive news of slow but steady economic growth from Fed Reserve Chairman Ben Bernanke and others, Reich says it’s not enough. “In a typical recovery, we would expect far better. And we’ve fallen into a far deeper hole than in a normal recession, so the recovery has to be much bigger.” So why is this recovery so different? “Most recessions are caused by the Fed overshooting in its efforts to control inflation and raising interest rates to high,” Reich says. “So it’s pretty simple for the Fed to reverse course, cut rates and get the economy back on track. But the Great Recession was caused by the bursting of a giant housing bubble, which directly reduced the value of most people’s biggest assets. Consumers can no longer use their homes as ATMs.”
• The Sacramento Bee – Is a double-dip recession ahead?
The economy “is pulling back to reality,” said Jeff Michael, director of the University of the Pacific’s Business Forecasting Center. “The most likely reality is a slow recovery. The data is going to bounce around a bit.” Consumers account for about two-thirds of all economic activity. A one-month drop in spending isn’t a cause for panic, but it is worrisome. The economy continues to face fundamental stumbling blocks, said Chris Thornberg of Beacon Economics consulting in Los Angeles. “I worry about the ability of the expansion to continue,” he said. “The banks are still a mess. Millions of people are still having trouble with their mortgages.”• The Wall Street Journal – Auto-Sales Optimism Fades
Just a few months ago, optimism was rising in the auto industry that new-vehicle sales would make a strong rebound this year after falling to historic lows in 2009. New data, however, suggest the recovery isn’t as strong as it appeared earlier in the year. The increase in auto sales in the first five months of 2010 has been driven by higher sales to rental-car companies and other commercial fleets—not sales to consumers, who are now showing signs of more pessimism about the economy, as well as a halting interest in buying new cars. “The industry is on the mend but there are reasons for caution,” said John Hoffecker, a managing director at AlixPartners LLP, a consulting firm that recently surveyed consumers as part of its annual study of auto-industry trends. “We’re still waiting for consumers to come back into dealerships,” Mr. Hoffecker said in an interview.
more commentary after the jump
Early in the recovery many forecasters, concerned that the nascent expansion was fueled only by temporary inventory dynamics and short-lived fiscal stimulus, fretted over the possibility of a double-dip recession. Now, with the emergence of the sovereign debt crisis in Europe, that concern has re-surfaced. Certainly we recognize that the debt crisis imparts some downside risk to our baseline forecast for GDP growth. However, based on current, high-frequency data — most of which is financial in nature and so is not subject to revision — we believe the chance of a double-dip recession is small.
One way we assess these odds is with a simple but empirically useful “recession probability model” in which the probability of experiencing a recession month within the coming year is a weighted sum of the probability that the economy already is in recession and the probability that a recession will begin within a year. The former probability is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production. The latter is estimated as a function of the term slope, stock prices, credit spreads, bank lending conditions, oil prices, and the unemployment rate.
Currently this model, updated through May’s data, estimates that the probability of another recession month occurring within the coming year is zero.
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June 14th, 2010 at 11:47 am
This looks like another contrarian indicator candidate.
June 14th, 2010 at 11:49 am
OT:
Here’s the wet dream of bankers and the return to the 19th century America that the Republican conservatives have lusted over for the past 30 years:
http://www.startribune.com/local/95692619.html
June 14th, 2010 at 12:01 pm
ECRI does not appear to agree.
June 14th, 2010 at 12:03 pm
Yeah, but what about a depression? Recessions are for wussies.
June 14th, 2010 at 12:06 pm
I think the probability that housing prices would decline was similarly discounted along about 2005 or so. That’s the thing about mathematic modeling. The universe ain’t a fucking model. It does damn well what it pleases, as everyone from theoretical physicists to economists to financial analysts should by now fully understand.
June 14th, 2010 at 12:06 pm
Okay so in mid 2007 there was only a 25% chance of recession even though there was a “Great Recession” one year later. Hmmmm
~~~
BR: Your chart reading skills are wanting.
By mid 2007, there was a 50% chance of recession (see red line). By late 2007, it was more than 75%
June 14th, 2010 at 12:08 pm
Getting it right:
Will the Market Tune Change in June? Bounceback clears Dow 10,000: http://ow.ly/1XbFv
June 14th, 2010 at 12:23 pm
I’d seriously question any model that spits out a probability of zero. Even the probability of the sun burning out this year is greater than zero. And if the sun burns out there will definitely be a recession.
June 14th, 2010 at 12:29 pm
For a counter argument, please see John Hussman’s predictive model here http://www.hussmanfunds.com/wmc/wmc100614.htm.
June 14th, 2010 at 12:30 pm
Models that rely on the slope of the yield curve aren’t useful in current circumstances.
When the Fed has short rates at zero the slope of the yield curve loses its predictive value, as Krugman has argued, simply because it CAN’T invert. The only bet you CAN make on future Fed policy is up, and such bets are what constitute the yield curve.
Add to that the bull flattener we’ve been getting (falling 10 yields) and it’s pretty hard to take heart from the yield curve.
June 14th, 2010 at 12:34 pm
The Persian Empire — sorry, Iran — has previously threatened to block the Strait of Hormuz, through which a large portion of the world’s oil flows. Whether they can or would do such a thing is an open question, but nonetheless, this headline implies provocation — “Iranian aid ships head for Gaza.”
Therefore, anyone who doesn’t at least consider in their economic models the possibility that oil prices will increase as a result of worsening Mideast tensions, is doing their clients a disservice. Higher oil prices most certainly would impact personal disposable income and industrial production.
~~~
BR: How is that different than any of the other threats they have made over the past 30 years?
By this one fundamental metric, Iran is always about to cause an oil spike induced recession. . .
June 14th, 2010 at 12:40 pm
They are probably wrong
June 14th, 2010 at 12:42 pm
What a joke!
Their great model showed the odds of a recession plunging (to .25) 6 months before the biggest recession in 70 years began. Stock prices hit record highs just 2 months before the recession began, so I don’t know how valuable they are in predicting recessions with the next 12 months.
As someone else said, this looks like a good contrary indicator…
June 14th, 2010 at 12:43 pm
Marcus
‘The Treadmill and the Poor Law are in full vigour, then?’ said Scrooge.
‘At this festive season of the year, Mr Scrooge,’ said the gentleman, taking up a pen, ‘it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.’
‘Are there no prisons?”
‘Plenty of prisons,’ said the gentleman, laying down the pen again.
‘And the Union workhouses.’ demanded Scrooge. ‘Are they still in operation?’
‘Both very busy, sir.’
‘Oh. I was afraid, from what you said at first, that something had occurred to stop them in their useful course,’ said Scrooge. ‘I’m very glad to hear it.’
‘Under the impression that they scarcely furnish Christian cheer of mind or body to the multitude,’ returned the gentleman, ‘a few of us are endeavouring to raise a fund to buy the Poor some meat and drink, and means of warmth. We choose this time, because it is a time, of all others, when Want is keenly felt, and Abundance rejoices. What shall I put you down for?’
‘Nothing!’ Scrooge replied.
‘You wish to be anonymous?’
‘I wish to be left alone,’ said Scrooge. ‘Since you ask me what I wish, gentlemen, that is my answer. I don’t make merry myself at Christmas and I can’t afford to make idle people merry. I help to support the establishments I have mentioned-they cost enough; and those who are badly off must go there.’
‘Many can’t go there; and many would rather die.’
‘If they would rather die,’ said Scrooge, ‘they had better do it, and decrease the surplus population.”
June 14th, 2010 at 12:44 pm
The Persian Empire — sorry, Iran — has previously threatened to block the Strait of Hormuz, through which a large portion of the world’s oil flows.
Don’t worry, BP is currently in the process of developing a method whereby you can ship the oil out underwater
June 14th, 2010 at 12:46 pm
In David Rosenberg’s newsletter today, he says that the ECRI leading economic index is now signalling an 80% chance of a double-dip recession.
June 14th, 2010 at 12:48 pm
@ Common Man — good one!
June 14th, 2010 at 12:54 pm
Insufficient inputs in their model. Never before have we had bank collateral under water to this extent, and the FDIC just extended their 100% coverage on non-interest bearing accounts through 12/31/2010. The housing and real estate crisis threatens to upend everything and with M3 contracting its bound to happen in the near future. If we get another shock to the organism (collective US mindset), like war in Korea or Iran and Israel, then that could easily force us into a depressive state again. Too many potential threats exist to make a statement with 100% certainty.
June 14th, 2010 at 1:00 pm
Those who have run out of unemployment benefits should be especially delighted to hear there won’t be another recession
June 14th, 2010 at 1:00 pm
Bonddad called the end of the recession last August so they have a lot of credibility with me. Recently they seem open to the idea of a “dip” because of persistently high unemployment and the moribund housing market. With few exceptions, no recovery in history went straight up from it’s low, I don’t quite understand the angst over a probably lull now.
@prior posters, what’s the antipathy with models? Did you even look at the chart posted? In mid ’07 the probability of recession jumped to 75% at the peak of a mult-year market rally. The market supposedly discounts trends 6 months forward, but I’d much rather have had this chart in front of me in October ’07 than the S&P 500.
June 14th, 2010 at 1:00 pm
Barry- it is time to go on NOAA watch — could you start a discussion regarding the impact of this storm
on the market– the 2pm update is going to throw the market in a tizzy if the storm intensifies.
http://www.nhc.noaa.gov/
June 14th, 2010 at 1:12 pm
@jpmist,
I’m glad I wasn’t relying on this chart in 2007. As I noted, it showed the probability of a recession in the next year plummeting just 6 months before the recession started.
I have nothing against models, but you have to do a sanity check, and this one doesn’t pass the smell test for reasons noted above.
Here’s more from Rosenberg today:
June 14th, 2010 at 1:17 pm
Hussman’s weekly market comment yesterday is about the probability of such a recession as well. His conclusion is a little bit different. Two of four criteria, which being in place signal a recession (“There have been no false signals”), are currently fulfilled. The other two are not so far from being present:
http://www.hussmanfunds.com/wmc/wmc100614.htm
June 14th, 2010 at 1:19 pm
Two words: black swan.
June 14th, 2010 at 1:21 pm
@nolansdad…if not this one then the next. Storm surge pushes brown sludge inland and coats all exposed organic and inorganic matter with a toxic incendiary layer of film…vix hits new high, ben b. orders all timber to be cut to supply printing presses. Recession?? What recession?
June 14th, 2010 at 1:22 pm
And then there is also my new favorite leasing indicator:
http://www.consumerindexes.com/
June 14th, 2010 at 1:27 pm
NolansDad Says:
June 14th, 2010 at 1:00 pm
Barry- it is time to go on NOAA watch — could you start a discussion regarding the impact of this storm
on the market– the 2pm update is going to throw the market in a tizzy if the storm intensifies.
http://www.nhc.noaa.gov/
———-
Good source for Oil Spill updates and the latest on Tropical Activity in addition to NOAA is Dr. Jeff Masters Blog at Weather Underground. He’s been amazingly accurate for years and it’s a great site for weather geeks who love charts and detail.
–
The forecast for 92L —Updated: 2:17 PM GMT on June 14, 2010–Jeff Masters
The National Hurricane Center is giving 92L a high (60% chance) of developing into a tropical depression by Wednesday morning, which is a reasonable forecast. The odds of development have increased since yesterday, as the storm has moved considerably to the northwest, away from the Equator. Now it can leverage the Earth’s spin to a much greater degree to help get it get spinning. It is quite unusual for a tropical depression to form south of 8°N latitude.
I expect that 92L’s best chance to become a tropical depression will come on Tuesday, and the storm could strengthen enough by Wednesday to be named Tropical Storm Alex. The farther south 92L stays, the better chance it has at survival. With the system’s steady west-northwest movement this week, 92L will probably begin encountering hostile wind shear in excess of 20 knots by Wednesday, which should interfere with continued development. Several of our reliable models do develop 92L into a tropical storm with 40 – 55 mph winds, but all of the models foresee weakening by Thursday or Friday as 92L approaches the Lesser Antilles Islands and encounters high shear and dry air. I doubt 92L will be anything stronger than a 45 mph tropical storm when it moves through the northern Lesser Antilles Islands on Friday and Saturday, and it would be no surprise if wind shear has destroyed the storm by then. However, as usual, surprises can happen, and the GFS and the SHIPS model (which is based upon the GFS) do indicate that more modest levels of wind shear in the 15 – 20 mph range late this week may allow 92L to stay stronger than I’m expecting. Residents of the islands–particularly the northern Lesser Antilles–should follow the progress of 92L closely, and anticipate heavy rains and high winds moving through the islands as early as Thursday night.
Oil spill wind forecast
There is little change to the oil spill wind forecast for the coming two weeks. Light winds of 5 – 10 knots mostly out of the south or southeast will blow in the northern Gulf of Mexico all week, according to the latest marine forecast from NOAA. These winds will keep oil near the coast of Louisiana, Alabama, Mississippi, and the extreme western Florida Panhandle, according to the latest trajectory forecasts from NOAA and the State of Louisiana. The long range 8 – 16 day forecast from the GFS model indicates a typical summertime light wind regime, with winds mostly blowing out of the south or southeast. This wind regime will likely keep oil close to the coastal areas that have already seen oil impacts over the past two weeks.
http://www.wunderground.com/blog/JeffMasters/article.html
June 14th, 2010 at 1:28 pm
Sorry…should have snipped that post down a bit…
June 14th, 2010 at 1:31 pm
@Marcus
Thanks for the article. I’ll wager that if you keep track of the comments on that article, you’ll see that most people come out for jailing debtors. Most people, I’m sorry to say, are morons.
June 14th, 2010 at 1:38 pm
C’mon guys …no one knows what a hurricane will do. You’re getting into CNBC BS by trying. Here’s a solid prediction: It will go a direction, ….or die out, hit land ….or not. There you have it. Want my earthquake in California predictions?
Here’s something actually relevant: Moody just downgraded Greece bonds to a junk rating. Someone remind me why is it that Moodys can AAA rate junk mortgages and send the markets zooming up yet they down grade Greece a month after everyone knows its junk? What a playground that Wall St is eh? Money means little there because they have no “skin in the game” its all your money they play with.
June 14th, 2010 at 2:19 pm
@MA: Incredible. We jail people for failing to pay credit card debt, but allow mortgage scofflaws to live rent free for months, if not years, and force banks to rewrite mortgages for them. It’s a hell of a country, ain’t it?
June 14th, 2010 at 2:52 pm
None of this really matters when you’re dealing with credit issues. A panic that starts today can have the economy contracting by this evening.
June 14th, 2010 at 2:52 pm
Of course the odds will be nil when you’re still in the recession. We need to get out of it first.
June 14th, 2010 at 3:05 pm
Models?!? WTF Barry?
June 14th, 2010 at 3:06 pm
America’s only hope is to leave both NAFTA and the Pan American Games …and hope for greater TV revenues by joining the Asian Games. The nation’s Board of Regents to vote tomorrow (the GOP suggests they’ll vote “No.”)
Canada dumps the Loonie and joins the EU with (with the bonus of a English and French-speaking entry into the Eurovision Song Contest.) Mexico? …Hola, Mercosur
The Caribbean micro-states find intellectual best fit and join Kansas to form the HSC …the Home-Schooling Conference.
June 14th, 2010 at 3:34 pm
Any chance you can get a chart like this for recessions back to, oh, 1960 using their models?
It is difficult to attribute predictive skill to their model with a chart showing only one recession on it.
June 14th, 2010 at 3:38 pm
When you have an indicator that is based entirely upon the slopes of a bunch of other indicators, the implicit assumption is that everything is going to continue to change along the same paths as they presently are.
That is almost certainly guaranteed to be false.
Consider just one of the items listed — unemployment. Looking at the recent chart posted on this blog comparing employment across several recessions, if we examine the current “recovery” in employment, we see that it is almost entirely due to census hiring — jobs that will be decreasing from this point forward, and entirely gone within a few months. Looking at the current slope of that chart, we can see that the future slop is much more likely to be a complete reversal of that slope than it is to be a continuation of it.
June 14th, 2010 at 3:45 pm
Don’t think anybody posted this yet….The Pragmatic Capitalist posted a piece by Bondsquawk today regarding the ECRI index and other items. Some excerpts:
“The Index has declined 6.21 percent in the past 12 weeks, which is the largest decline in the weeks prior to all of the episodes of negative growth rates, head-fake or not. Comparatively, the average decline for the ECRI Index stands at 1.59 percent for episodes that led to a recession (excluding the 1981-82 recession where the ECRI Growth Rate failed to predict a recession). The average drop for head-fake episodes is at 1.04 percent.”
“It remains to be seen if negative growth rates will persist long enough, which could signal another recession.”
“However, in the event that today’s readings persist in negative territory, the U.S. economy may not be able to avert a recession in the same manner of the four previously mentioned head-fakes. A response in Monetary Policy may be limited today given that the Fed Funds Rate cannot go below zero. While the U.S. government has other tools to stimulate the economy, we may not have the political will to enact them as well as perform them in a timely manner. Given these restrictions coupled with the significant decline in the ECRI Index, the risks of an economic slowdown followed by double dip are certainly present. ”
http://pragcap.com/is-the-ecri-indicator-enough-to-signal-a-double-dip
June 14th, 2010 at 3:47 pm
“slope”, not “slop” … or perhaps a serendipitous expression of Truth …
June 14th, 2010 at 3:55 pm
America’s $12 trillion debt creates the ultimate headwind for a recovering economy. However, such times also encourage change and innovation – the kind that doesn’t show up in the numbers.
June 14th, 2010 at 4:29 pm
And Krugman pointed out that at the zero-bound, the interest rate slope has not the same predictive validity.
June 14th, 2010 at 4:36 pm
@ BR — “By this one fundamental metric, Iran is always about to cause an oil spike induced recession. . .”
Well, that’s certainly true enough — hot air flows out of their mouths with regularity. But something feels different this time, maybe because Iran is taking direct action, not just talking. They usually take action indirectly, if at all, through surrogates. In any event, I do think potential confrontations like this make it easier for emotions to get out of hand.
June 14th, 2010 at 4:45 pm
I’ll tag Lakshman Achuthan of the Economic Cycle Research Institute about the ECRI LEIs.
Meanwhile, see his Kudlow appearance from last week — he specifically stated “No” on the double dip recession
June 14th, 2010 at 4:51 pm
If the data are so good, why is everyone screaming double-dip?
I think the last week’s data were pretty good. I know I’m putting a bullish gloss on things here but the jobs number was up at the end of the previous week, jobless claims were better, consumer confidence is up, freight and truck traffic is up, and we saw some modest consumer deleveraging. Moreover, despite the shockingly weak retail number, if you strip out the non-core measures, the number wasn’t terrible (it wasn’t good either). So, on the whole, the data were ok. Moreover, the market seemed to like the data as shares rallied from an oversold position last week.
The problem comes when you dig beneath the surface to more forward-looking data.
ECRI data. The ECRI numbers have been misinterpreted by analysts. There is nothing in the numbers which indicates imminent double-dip recession. They are not that dire. ECRI Leading Indicators levels are now flashing red because this tool suggests slowing growth. That’s all. I have said I expect 1-2% in the 2nd half of the year. And the ECRI numbers are in line with that. Let me explain where the slowing growth is likely to come from and what that could lead to.
June 14th, 2010 at 5:00 pm
“Here’s the wet dream of bankers and the return to the 19th century America that the Republican conservatives have lusted over for the past 30 years.”
Uh, Marcus…
In case you weren’t aware, Minnesota is a BLUE state:
http://en.wikipedia.org/wiki/List_of_state_legislatures_in_the_United_States
http://en.wikipedia.org/wiki/Red_states_and_blue_states
June 14th, 2010 at 5:13 pm
Sorry BR, by “mid-2007″ I meant somewhere in Q2 of 2007. Yes the model did jump to 75% at the end of the year, but at that point was that really prescient?
Also what kind of model goes from 100% to 0% in one quarter (Q2 2009)?
June 14th, 2010 at 5:20 pm
Hennepin County is not blue. Granularity- know it, love it.
From the article:
“The law enforcement system has unwittingly become a tool of the debt collectors,” said Michael Kinkley, an attorney in Spokane, Wash., who has represented arrested debtors. “The debt collectors are abusing the system and intimidating people, and law enforcement is going along with it.”
If one were to dig deeper, soon a stunning pattern of consanguinity would reveal itself between the public sphere and the debtor collection. Government as instrument. Por los siglos de los siglos…
June 14th, 2010 at 6:17 pm
Hasn’t it been firmly established that economic forecasters are overly optimistic? I would never trust a chart that only identifies that there is a recession 9 months or so into it. Any way that line looks like it could conveniently zig or zag or jag about as it suits from one day to the next.
June 14th, 2010 at 6:25 pm
Recession, How short/long of a period till Mr. Jobs sells his 1st. million of I-PHONE 4′s?
June 14th, 2010 at 6:28 pm
@Pool Shark: I live in MN. In reality it’s more purple than blue these days (e.g. a two-term GOP governor and before that a former wrestler as governor). It’s more complicated than the false “red-blue” construct that you present.
June 14th, 2010 at 7:19 pm
BR, it seems like Achuthan wasn’t saying no to a double-dip, only that the one-month’s read is too little data to say – “that’s not predictive”.
Achuthan told Jon Markman last week that he will need 3 months of data to make that call. “Lakshman says this *could* be a prelude to a new recession call, but he won’t be able to make that judgment for two months. In the meantime, he only said that all the fiscal austerity measures in Europe are likely to put a lid on global economic growth — particularly for commodity prices — which can in turn have a negative effect on global stock prices.”
So he’s not saying a double-dip isn’t possible, only that it’s to soon to tell. FWIW, I’d say that at the moment Markman is in ‘it could be a rocky summer and fall, but then the bull will continue” camp.
June 14th, 2010 at 8:19 pm
I’ve had to book mark this post. Can’t wait to revisit it a year from now….
June 15th, 2010 at 3:40 am
Krugman takes down MacroAdvisors. Any predictive model that incorporates the term slope will be misleading when the front end is up against the zero bound. And as if that weren’t bad enough, their model also includes stock prices. What were stock prices predicting in 2007?
June 16th, 2010 at 4:28 am
That curve on the graph can change awfully fast, can’t it. It may be at zero now, but can go to near 100 awfully fast. The yield curve is the biggest indicator of a coming recession. With ZIRP, the curve can’t invert, but it can flatline. Long term rates could go to zero also. Since the President probably wants this very outcome, it has a higher probability than zero.