Recession predictions? Better late than never

August 9, 2011

The chances of a second U.S. recession are rising. But just how high a probability is always difficult to gauge. The latest Reuters consensus from private sector economists – most employed by an industry that got us into the mess – is currently one in four. That’s not very high, but it has crept up from one-in-five when we asked the same people two weeks ago.

In the meantime, the U.S. has done what many would never have thought possible – it lost its AAA sovereign debt rating from Standard & Poor’s, thanks to an acrimonious political debate over the debt ceiling and, in S&P’s judgment, inadequate legislation to tackle deficits over the long-term. Global stock markets have plummeted 20 percent since May, racking up staggering losses over the past few days, rattled by that U.S. rating downgrade, worries about a world economic slowdown, and a spiralling euro zone debt crisis that now is lapping at the shores of a G7 country — Italy.

The fact it’s been too long since the Great Recession technically ended to call any new recession a “double-dip” shows just how dire the situation is. Nouriel Roubini, known to most as “Dr Doom” for talking down the U.S. economy through bubble years but getting the call right on the last recession, is one of the few who have already called the next one.

Kenneth Rogoff, professor of economics at Harvard University, takes it a step further. Whether or not advanced economies have slipped back into recession, he says, is a moot point given that two years into recovery, none of them have yet to achieve the pre-recession peak in gross domestic product.

That may be true, but consensus forecasts on whether or not we’re headed back into the abyss still tell us something.

  • Last year, when hopes of a U.S. economic recovery were taking hold, economists as a group gave a mere 15 percent chance of a recession in the next 12 months. They were right.
  • Now, with mostly dismal U.S. data coming in on a daily basis, from growth to confidence to consumer spending, economists see only a 25 percent chance of a recession.
  • None of the 42 economists who answered the question in the latest poll saw a probability of greater than 50 percent. Nowhere in the forecast horizon do economists see any quarterly contraction.

We now know when the U.S. economy last ran into real trouble, it contracted in Q1 2008. J.P. Morgan bought troubled U.S. investment bank Bear Stearns in March. Six months later, Lehman Brothers went under, leading to a credit crisis that sent the U.S. economy into its worst recession since the Great Depression.

  • Economists had a whiff of that coming toward the end of 2007 – but only a whiff. According to the October 2007 Reuters poll, there was a median 30 percent probability of a U.S. recession in the next 12 months.
  • That rose to 35 percent in November, 40 percent in December, 45 percent in January 2008, held at 45 percent in February and then rose to 60 percent in March.

Perhaps economists can never agree on predicting a recession until they’re in one. That means that if there’s already a 25 percent chance, we should be worried.

With thanks to Anooja Debnath and Ruby Cherian

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gerat read Anooja :))

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