When Will the Recession End? 33 comments
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Now that the election is over, President-elect Obama has a tough economic road ahead. The advanced GDP report of -0.3% suggests that the
A widely used index of economic activity is the Chicago Fed National Activity Index [CFNAI]. The index is released monthly and is a weighted average of 85 indicators of economic activity. Since the index is calculated using monthly data it can be used as a leading indicator for quarterly GDP. The following chart shows the CFNAI since 1967 with recessions in red.
The Chicago Fed produces two indexes, a monthly index and a three-month moving average of the monthly index. The three-month moving average index smoothes any volatility in monthly numbers and is used for economic forecasting.
A zero value for the three-month CFNAI indicates that the economy is expanding at rate of growth that is consistent with its historical trend. An index reading below -0.70 following a period of expansion indicates that a recession may have started. A reading above 0.70 two years into an economic expansion indicates increased probability that a sustained inflationary period has begun.
The three-month CFNAI crossed below -0.70 in December of 2007 and is therefore the likely start date of the current recession. According to the NBER, since 1967 there have been 6 recessions. The longest recessions lasted 16 months and occurred from November 1973 to March 1975 and July 1981 to November 1982. The shortest recession started in January 1980 and ended in July 1980, for a total of 6 months. The average recession lasted for 10.8 months.
Using the NBER figures and a start date of December 2007, the following recession window can be interpolated:
From this table it is clear that the
The start date of the recession is consistent with Federal Reserve models of the probability of recession. In a 2006 report, Jonathan Wright, a Fed researcher, developed a model for predicting the probability of a recession using the Treasury yield curve. The model developed used the 10 year - three-month spread and the effective fed funds rate. The following chart is from Wright's paper and shows the probability of a recession since 1964 using his Model B. (Recessions in red)
Model B was found to be a good predictor of recessions within 12 months of a high probability reading. Interestingly, it appears that the critical probability level for predicting a recession is 50%. Once the indicator reaches this level, there is high certainty that a recession will occur in the next 12 months.
Using Model B and current data yields, the following results from 1997-2008.
This graph illustrates that the probability of a recession in the next 12 months reached the critical level of 50% in the first quarter of 2007. Within 12 months, the three-month CFNAI crossed below -0.70 indicating a recession has begun. This provides more support for December 2007 as the start date for the current recession.
The Federal Reserve Bank of Philadelphia also publishes the probabilities of a recession in its Survey of Professional Forecasters [SPF] report. This data goes back to 1968 and shows the probability of a recession occurring in the next quarter. (Recession in red)
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With this series, it appears that 40% probability is the critical level in predicting a decline in GDP in the next quarter. Interestingly, the probabilities breached the 40% level in the first quarter of 2008. While not an exact match with Wright's Model B or the CFNAI data it is fairly close and can serve as additional evidence that the current recession began near the end of 2007 and the beginning of 2008.
After falling below 40% for one quarter, the Anxious Index breached the 40% probability mark again in the third quarter of 2008. This suggests that forecasters are expecting a decline in GDP for at least one more quarter. This projection means that the recession will last until March 2009, which is consistent with the long recession projection of April 2009.
The next CFNAI report will be released on November 24, and could provide clues regarding the duration of the economic malaise. Watching the 10 year - three-month spread and effective rates will also be of utmost importance.
Disclosure: I have no direct positions in any securities mentioned.
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We have not simply slowed down on our way to picking up speed again in a few months. The dynamics of the entire system have changed and are still evolving.
Keep your money safe and wait for the dust to clear. Don't try to buy the bottom; instead wait until it's clear that it's past as there's plenty of money to be made between the bottom and top without timing both perfectly.
The "Big Wheels" are now having trouble fleecing (through the federal reserve/Wall Street) the citizens because as a whole, we are broke. Too bad for the "Big Boys". Well, they can keep going for a little while on the bail-out money. As for when "it" ends, I don't believe I will live to see the end.
On Nov 06 04:38 PM perceptions_now wrote:
> What is the Motor of the World and why is it stopping?
> Let me say from the start, that the world and its financial system
> are now more interlocked than any other time in history and that
> the butterfly effect is very real. We have also stepped into the
> unknown, into a new paradigm and there is no going back!
Very well thought out and perceptive assessment. I think much of the population thinks that, given a few more months, maybe even a year, things will be back to "normal" and we will be back on the road to ever-increasing prosperity. I don't really see it that way myself either, as our insurmountable debt, combined with all the other factors you mentioned, will be a tremendous ball and chain on future prosperity.
It's actually time for Western nations to rethink their seeming distaste for conservative family values and rethink the possibility that having children and raising them with old-fashioned values, strong character, and a good work ethic is what built up the American nation and would serve us well again. Methinks it would bring much more satisfaction than placing so much value on our stock portfolio and having 2nd homes, but only 1, maybe 2 kids...or in some cases none (but always 2 dogs, of course....)
We've had it wrong and its time to rethink.
There is ONLY one way to get out of this mess.
Put the american public back to WORK.
Bring our work back home, buy american, conserve, and help our neibors.
On Nov 06 06:56 PM User 171371 wrote:
> When the Democrats pass all their Socialistic policies and programs
> our country will look like a decadent European Society.
>
> Does anyone in their right mind think its business as usual after
> the next four years.
>
> Pray that Obama moves to the middle.
personally i feel the marxian theory is right: capitalism will destroy itself...but dont worry . communism is already dead!! the synthesis will be on the lines of politico/economic system in countries like india sans indias own corruptions and inefficiencies.
i am not a hotshot mba or phd.I am adding this I want people to believe me!!!
I have no argument for anyone on the results of the Republican direction for the country. I am living with it. From the thousands of sources that I have found on this issue, the overall view is that banks were derregulated, created their own faulty lending practices, sold the loans off to someone else for a profit.
Subprime lending only started under the Republican Administration and the Republican controlled congressional branch. These problems did not exist under Clinton because there was still oversight into the lending practices of banks.
As far as the recession is concerned. I have never lived through something as damaging as the last 8 years of Repbulican policy has yielded. I pray for our country and for our new President who has more to say than, "So what" or that we are a bunch of whiners for being upset that our jobs are gone and our life savings has been demolished. The Republicans borrowed 100 percent of the money for the War in Iraq. That cost over a Trillion dollars. There were no weapons, so, what a costly mistake. Then they spend another 800 billion or so on the first knee jerk stimulous. This was constructed by the Republicans not Democrats.
Tax cuts are nice, but over the last 8 years, they borrowed money to give them. Then gave the lions share to the wealthies Americans. 1%. That was Hundreds of Billions of dollars.
The Borrow and Spend Republicans are by far to blame for this whole situation. I do not know if there is a true fiscal conservative in government.
The last fiscal conservative we had in our government was BIll Clinton. Boy what we would give to have those prosperous days back.
The Republicans also stated that sending the white collar jobs to India and China would be good for our economy. Missed the boat on that one. Now they have middle class, and ours is shrinking.
Bottom line, middle class and below circulate and spend the money. The top end hoards and stores the money. Trickle down economics has never worked. Did not work for Republican Herbert Hoover, Republican George H W Bush, and now not for President Bush and Cheyney.
Until the money circulates, the economy will not return. That is a fact. Until Americans are able to pay as they go (Bill Clinton's Plan). The Democrats are also for the American worker, where the Republicans for for the elite and few. It will never trickle down, so we should never try that again.
Solutions:
Bring jobs back to the US so that the money can be generated here and circulated through our economy.
Cut taxes on the middle so the money can circulate through the economy.
Require the wealthies Americans to pay their fair share of the burden.
I could go on.
What a mess the Republicans have created for us. Two wars, and economic crisis. All cost money, all cost your money.
Next time we put a cowboy in charge, make sure has not failed at just about every business he has been involved in.
Sincerely,
A true American.
> our country will look like a decadent European Society."
Really, you should be so lucky. At the moment the Euro is up vs the pound and the US dollar better than usual and most European countries have no where near the housing crisi the US has on its hands, the expensive military expansionisti policies of the US or the terrible reputation the Bush administration has given it. I am pro capitalism and pro USA the way it used to be run prior to Bush so dont get me wrong but there is a worldwide sentiment and in some cases a morbid desire to see the worlds biggest superpower falll flat on its face because of the greed of its own capital / debt markets. I hope this will not be the case but I think what we are about to witness is a global shift of power and growth across the globe to where growth is still needed. Read Asia, Europe etc. The US markets have almost reached growth saturation save for those industries now investing abroad such as in China, Russia, and India. I still think the emerging markets could keep the US banks afloat while the housing market completes its natural adjustment.
On Nov 06 06:56 PM User 171371 wrote:
> When the Democrats pass all their Socialistic policies and programs
> our country will look like a decadent European Society.
>
> Does anyone in their right mind think its business as usual after
> the next four years.
>
> Pray that Obama moves to the middle.
On Feb 09 07:53 PM User 354057 wrote:
> "When the Democrats pass all their Socialistic policies and programs