Tuesday, February 03, 2009

Fed Model Predicts No Recession By End of 2009

Following up on my earlier post today on the NY Fed's model that predicts the probability of U.S. recession using the Treasury spread, here's a graph above with a "closer look" at the recession probabilities from January 2000 to January 2010 (data here). The shaded area on the left is the 2001 recession (March-November) and the right shaded area is the period from when the current recession started (Dec. 2007) and January 2009.

As the data and graph suggest, there is almost no possibility that the economy will be in recession by the middle of this year according to the Fed's model, which has accurately predicted the last 7 recessions, back to 1960.


At 2/03/2009 5:23 PM, Anonymous Anonymous said...

It works until it doesn't work. Then it fails miserably. Just like all the crappy risk models that allowed S&P and Moody's to rate subprime toxic garbage as AAA. Worked great until 2006, when it exploded.

As you say, it predicted the last 7 recessions BACK TO 1960. This recession isn't like any of those. It's a global credit bust, the likes of which hasn't been seen since the Depression. Private debt to GDP has never been as high, except in the late 20s.

So as usual the Fed is completely wrong.

Funny seeing a free-market economist point to the Fed when it's a CENTRAL PLANNING authority on the most important good in the market: money.

At 2/03/2009 5:26 PM, Anonymous Anonymous said...

Yes anonymous. You and your pessimism knows more than the collective wisdom of nearly 50 years of actual real world macroeconomic experience. You alone are the soothsaying prophet of doom...

At 2/03/2009 6:12 PM, Anonymous Anonymous said...

Anonymous must be Roubini!

Don't miss this piece about Dr. Doom's actual record.


One concern here - there was a similar low probability in early '02 and the recession wasn't finished yet

At 2/03/2009 6:31 PM, Blogger QT said...

Carmen Reinhart and Kenneth Rogoff also offer some reason to be optimistic with a few caveats. Keep your fingers crossed!

At 2/03/2009 6:40 PM, Blogger Unknown said...

I don't remember a bailout so large being needed.

The housing boom was based on poor mortage lending which caused an uptick in the economy.

Meanwhile, the money pit is getting deeper and the fed will at some point, no longer use a bail out or lower interest rates to stimulate the economy.

The only option left? Bankruptcy.

And a huge federal deficit to pay back.

Also, since our economy is now dependent on the world economy, we have to look at what other countries are doing.

At 2/03/2009 8:58 PM, Blogger marketdoc said...

Great independent source to predict the status of things. There are already signs of economic improvement. In Southwest Florida housing inventories have dropped from 24 months to just 8 months over the past year in one of the main counties that was hit hard by the real estate collapse. Also, a recent preview of real estate properties had a tremendous turnout. Over one hundred realtors showed up and were buzzing about the pending deals they had in the works. Don't listen to the doomsayers who are looking at data that is already 3 months old. The recovery has already begun.. even before the so-called stimulus package gets passed.

At 2/03/2009 10:35 PM, Blogger wcw said...

The recovery has already begun? Well, at least we have a better. Sure, he's going to lose when the NBER finally picks a trough month, but at least he tried. Unlike our host.

What month does the recovery begin, MJP?

At 2/03/2009 10:54 PM, Blogger Shawn said...

...I think anon's notion of 'it works till it doesn't' is pretty spot-on.

But maybe I'm just drinking too much of the Taleb kool-aid lately.

At 2/03/2009 11:58 PM, Anonymous Anonymous said...

Tom: Remember the S&L crisis of the late 80s/early 90s? Here is a bit of a refresher:

"The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 747 savings and loan associations (S&Ls) in the United States. The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government—that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts[1]—which contributed to the large budget deficits of the early 1990s.

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, the lowest rate since World War II."

At 2/04/2009 8:10 AM, Anonymous Anonymous said...

Mark, Please tell us how your chart shows this indicator "predicted" the last two recessions. Prior to the onset of the recessions, the probability indicated was 21% and 40% respectively. An event with a less than 50/50 chance is not "predicted."

john walker

At 2/04/2009 9:20 AM, Anonymous Anonymous said...

it has dawned on me that many of the individuals here leaving comments are bright eyed, bushy tailed STUDENTS full of idealisms, academic theories, and little practical knowledge of the real world.


At 2/04/2009 12:16 PM, Anonymous Anonymous said...

I like this site. Also, another site I've found that provides basic information for consumers is (www.recessioninfocenter.com) which I really like in terms providing basic helpful information.

At 2/04/2009 12:54 PM, Blogger misterjosh said...

I sure hope you're right! (though I don't think so)


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