End of the Recession in 2009? 53 comments
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According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."
Monday, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through January 2009 and its recession probability forecast through 2010 (see chart above, click to enlarge). The NY Fed's model uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).
The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (.82% by January 2010). The Treasury spread has been above 2% for the last 11 months, a pattern consistent with the economic recoveries after the 1990-1991 and 2001 recessions.
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.
Bottom Line: The New York Fed's Treasury spread model predicts the end of the recession in 2009.
Thanks to Andrew Greene for the tip.
Update: According to Brian Wesbury and Robert Stein in Forbes, "Some early warning signals suggest an economic recovery should start taking hold by mid-year."
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This article has 53 comments:
The Fed is in the game of managing expectations. At the moment, it needs to restore confidence. It therefore produces data that supports those objectives. If you believe it, then you become one of their success stories.
1. The steeper yield curve, which normally increases bank profitability, must be accompanied by increased lending in order to have the normal effect.
2. We must get close to a bottom in housing prices, both time and price.
3. The slide underway in worldwide economies must stabilize within the next 12 months.
4. The uncertainties about banks' insolvencies must end.
There may be some more things necessary to get the same reaction to the yield curve as in the past seven recessions, but these certainly are important factors.
In order for past results to be achieved we must have conditions similar to the past. It is not clear that this is happening here yet.
seekingalpha.com/artic...
We're hardly in the same place now. Let's hope we don't get there!
The Fed models correlate to previous Fed-generated recessions. This is a different beast.
We have not had "Quantitative Easing" or ZIRP in the recessions covered by this model. We also have not had government intervention in the financial markets on the scale we are seeing today. Therefore, I would be leery reading anything of predictive value into these charts.
I also believe that the charts themselves show how wrong the model can be. The probability of recession never exceeded 40% during 2008, even though we were already IN this recession. This means that, as of 1 year ago, we had a 60% probability of NOT being in a recession now.
Additionally, a closer look at the longer-range chart shows a number of false peaks and valleys that don't correlate with either recessions or recoveries.
Finally, the shorter-range chart combines actual and projected data to seemingly confirm the prediction. While the past data may be accurate, there is no basis for the projection and only a random luck chance that the projections will be accurate.
Considering how poorly the current state of events was predicted, I won't be betting any of my own money on recovery this year.
This is playing out very similarly to the crash of 29. Most big banks were insolvent back then as they are today. Corporations were full of debt as they are today. Consumers overconsumed on credit during the roaring 20s as they did in the go go 90s and up to 2005. There was a florida housing boom in 1927 just like there was leading up the bust today.
The crash of 29-32 was 2.8 years long. 89% of the credit induced peak value of the Dow was wiped away, never to return until 1955 and that is not inflation adjusted. For all intents and purposes, most people never recovered.
You are a victim of the slope of hope. Hope is what kept sheeple invested in the Dow in 1929-32 and hope like yours will keep sheeple in the Dow and S+P and NASDAQ as they all auger in. Best case for the Dow is an L shaped bottom at 4000 but only if Bernanke succeeds in replacing credit inflation with monetary base inflation. In that cash gold will be $4000/oz. The bottom will be in when the Dow can be bought for one oz of 24kt gold.
Latest talks with China matter too.
I gotta agree with this guy. It took Sweden 5 years for unemployment to peak at over 9% and 8 years before it got down to 5% when they had their bubble burst in 1990.
There can be no recovery until the banks are solvent again. Then someone has to have the confidence to start taking out loans again.
Unemployment wont peak until mid 2010 at the earliest
PS Brian Westbury is an awful "Economist"
I tend to think that the market normally thinks an economic downturn will last forever near capitulation point, so all the doom and gloom above is to be expected. Even though I'm more optimistic than some, a mid-2009 recovery seems a bit early to me; late '09 or sometime in '10 seems more likely to me.
All the same, the stock market appears close to bottoming out to me. It's getting pulled down by uncertainty more than anything; once that uncertainty is removed, it will start to recover. Hopefully, once the Feds unveil a comprehensive plan to deal with the banks, that will help stabilize the markets some --- even if it's a lousy plan (and there's a chance it will be), it should still help remove some uncertainty.
The spread is not much of an indicator of anything so far as I can tell.
The problem is this one says the market could remain low over one up to 3 years, meaning stay at the bottom for some long time.
Could happen.
Whoops, as usual we only get data from a time period that gives the author the results desired.
This is all very interesting in normal times but we are not in a business cycle recession we are in a great unwind where leverage is the key issue. We are nowhere near the end, only one day nearer than yesterday.
What do two thirds of Americans know that people in Ivory towers and grand, exalted chambers of Power, such as the Fed board meetings don't know?
Of course, we already know that Greenspan has admitted that he didn't realize there was a housing market bubble. Or that unregulated debt instruments could blow up out of control.
Of course, it is always "too little, too late" as the followers of your advice will soon find out...
When the end is suddenly realized, a wall of cash will hit equities over the following year or 2. That's what always happens. Look at historical DOW returns. Double-digit negative years are almost always followed by double-digit positives. Over the course of your lifetime, you can expect several such experiences, which is why equities are an unsuitable place to invest money you need within 10 years.
Recessions always seem like the end of the world, and pundits with fringe economic theories make them even scarier. Sometimes you have to turn off CNBC and the doomsday websites and observe the world around you. Here are a couple of data points from my neck of the woods.
-There was a 30 minute wait when I went to Chili's for lunch yesterday.
-Several international corporations have announced new factories in my area.
-Home prices in my area are higher than they were in 2004, and are actually selling at those affordable prices.
-Several local concerts and events have sold out.
-Gasoline selling for just $1.79
-Traffic is still a pain in the %#@!
On Feb 23 05:42 PM Chris B wrote:
>Here are a couple of data points from my neck of the
> woods.
>
> -There was a 30 minute wait when I went to Chili's for lunch yesterday.
>
>
> -Several international corporations have announced new factories
> in my area.
>
> -Home prices in my area are higher than they were in 2004, and are
> actually selling at those affordable prices.
>
> -Several local concerts and events have sold out.
>
> -Gasoline selling for just $1.79
>
> -Traffic is still a pain in the %#@!
And here a couple from mine (SF Bay Area):
* Corporate outlooks are dismal. Most have "no bottom in sight".
* European revenues have fallen off the planet. For many tech companies, this is the largest portion of their recent revenue growth.
* More job cuts are coming. Companies that cut 10%-15% earlier are now preparing to cut another 10% or so before year's end.
Traffic still does suck, but congestion periods are becoming visibly shorter. In many areas jams are gone shortly after 6:00pm. By comparison, in 1999 jams in those areas stretched until 8:30-9:00pm, and in 2005 jams lasted until 7:30-8:00pm.
I won't even go into real estate. lol.
Speaking purely scientifically, the reference to 7 recessions accurately predicted (the data for which we cannot see) is not compelling either.
In financial analyses like this economists get away with tricks that no scientist would ever be allowed to get away with. Can you imagine Boeing getting a new aircraft certified to carry passengers purely on the basis of "well it flew 7 times without crashing".
I am not trying to be overly cynical, just caution people on the risks of taking too much to heart observations like this which are simply not statistically significant enough to be compelling evidence of anything.
Now if this observation were coupled with *many* other similar indicators the picture may start to convince, but on the basis of this alone I would plead with people not to change their outlook.
100's of billions of dollars of foreclosed real estate has to be sold and cleared off the books at a steep loss.
100's of billions of dollars of credit card debt and defaults have to be accounted for.
100's of billions of dollars of Commercial Real Estate has to be repopulated with businesses.
An economic recovery has to occur to make up for all the job losses so far and will still be occurring during this year in order for people to stave off foreclosure, or buy a foreclosed home, or invest in a bank, or buy and American car or rent some office space.
Does anybody think all that and more will happen in 2009?
Me neither.
Yeah....still don't believe it.
As far as comparisons to 1929 go, I wouldnt' be too quick to breathe a sigh of relief. We don't know how this is going to play out. We are still in the early innings, and in a lot of ways we are entering this in worse shape now than we did then. (Here in the US, e.g., we have a government already committed to nondiscretionary entitlements and debt service we couldn't afford in the fat times; also negative trade and account balances ---for starters).
"-The Ides of March have come.
-Aye, and not gone Caesar."
Saying that I closed out my shorts today. Although there is still some more downside I try and avoid being too short, whenever we go below an RSI of 30 on the SPX.
Looking to take advantage of the next bear market rally, fed by all the long-only fund managers, who have no-idea on what is actually happening. After the rally I can reinitiate my shorts again.
My only fear is that the financial system may collapse soon, thus reducing my ability to monetise profits. The trading element of my portfolio will thus reduce and my cash position increase to 90+%
"Tell him he's dreaming!"
I wish it could be true, but I just don't think we'll get off that lightly, unless it is a little bounce before the abyss....
On Feb 24 02:14 AM zermux wrote:
This is not a recession. It is a hyper depression, of which we are only at the start.
After all, there's quite a few other indicators that are showing anything but a happy, cheerful end to this recession by the middle of 2009.
For one, the many foreclosures that we're expecting on the horizon, which is not going to do banks, especially small, overexposed local ones, any good.
That in combination with ridiculously expensive bonds rates for even blue chip companies (let's not even get into other forms of borrowing for smaller companies), and our expectation of a crowding out of private investment with all of this massive government stimulus and issuance of debt...
I'm not really seeing the rosy picture myself.
I'd really like to believe it. I'd really like for you to be right. But unfortunately, I just don't see it happening.
Not. I don't believe a word that comes out of that cesspool of economic slavery. And why aren't the Fedheads getting together and making sure that they are spreading the same lie at once? Because when you listen to what the other Fedheads have been blabbering about lately, it looks like we're going to be here for quite some time and are nowhere near bottom.
Any ideas?
One driver of the currently disappointing velocity of money may be the wider than historical spread between the three-month T bill and 3M LIBOR (the rate at which banks borrow from one another), otherwise known as the TED Spread and something which the chart obviously does not capture. While it has come way off from his stratospheric highs last September, it still is about 50 bps above its long-run historical rate. Of course, there are other drivers, arguably more salient, such as the uncertainty related to balance sheet holes/capital needs and subsequent reluctance to lend.
On Feb 05 01:26 PM Duude wrote:
> I'm lovin' all this negativity. Keep it up. I'm looking forward to
> this bear market ending in a few months.
On Feb 24 11:55 PM jeerio wrote:
> Dudes of the World: this market (all the markets) will be much lower
> before things turn around. all the government can do is slow down
> the drop so as not to cause real panic, just a depressing malaise.
> societies cannot tolerate the sudden destruction of our institutions,
> norms and expectations so they simply won't let it happen. cynics
> will say they do that for their own political purposes, but in reality,
> they exist to manage situations exactly like this - things we can't
> accomplish as individuals. everything else is just noise and BS.
> we are far from equilibrium in these systems, so hold on, it's going
> to be nasty and last longer than we might otherwise imagine.
On Feb 04 05:14 PM Staffing Services wrote:
> If this recession is going to end in this year as you said and as
> per statistics, then that would be really a great news for all of
> us.
Another difference is that In the 1929 - 1933 period the large economies of the world could be counted on one hand. Today we have a G20. Many countries that were European colonies or third world countries in 1929, today are wealthier and more productive than Weimar Germany in 1932. Today's world economy has much more depth, diversity and dispersion. It's also much more intertwined. Maybe unfortunately in the short run, but an eventual advantage.
Today 's problems would probably lead to an equally disasterous economy as 1933's, IF the same things were being done by today's governments. However, that is not at all the case. Also, it has always been true that it takes 6 to 9 months for just a FED rate cut to show results in a normal downturn. This is certainly an unprecedented downturn, but the response has been unprecedented and massive. Still, to expect quick positive results in the face such a complicated web of fear, failure, and financial corruption is foolish. When mountanous bubbles burst, involving every asset class, it takes a while to reach the valley floor. However, the responses of the governments and entrepeneurs of the world will keep us from sliding into the sea. BTW, we all know that the stock market moves according to where traders think earnings will be in 6 to 8 months. That suggests that most of us will still think our personal, community, and state economies are bad to rotten when the market rallies. Remember there's trillions of dollars waiting to be put to work. I don't think that latter was true in 1932.
All the discussions above regarding the continuing to rise in unemployment failed to mention that employment, being a trailing indicator, is usually the last thing to improve.
My belief is that this time residential and commercial real estate will be the last to show real strength.
Lastly, I have appreciated the excellent comments by so many of you. The Charts and interpretation the author shared were at worst still interesting. Also, those of you that have completely dismissed the author might consider the PHD that follows his name. Just a thought....
In addition, this time we have a government w/ veto proof majority who are going to promote alternate energy. OK, but they'll likely reduce competition by taxing low cost electric producers.
health care plans will make workers more expensive, Free child care ( called pre kindergarden education) will result in welfare moms being paid to babysit each others kids.
Stimulus spending will take a back seat to pork plans, then be implemented at great cost on top of whatever pork has been served.
I may be wrong, but I'm not in any haste to pick a bottom until every possible asinine liberal wet dream has been announced.
On Feb 04 11:59 AM Larrysyr wrote:
> I liken the Fed's model to a mutual fund prospectus, which has to
> say "Past results are no guarantee of future performance."
>
> The Fed models correlate to previous Fed-generated recessions. This
> is a different beast.
>
> We have not had "Quantitative Easing" or ZIRP in the recessions covered
> by this model. We also have not had government intervention in the
> financial markets on the scale we are seeing today. Therefore, I
> would be leery reading anything of predictive value into these charts.
>
>
> I also believe that the charts themselves show how wrong the model
> can be. The probability of recession never exceeded 40% during 2008,
> even though we were already IN this recession. This means that, as
> of 1 year ago, we had a 60% probability of NOT being in a recession
> now.
>
> Additionally, a closer look at the longer-range chart shows a number
> of false peaks and valleys that don't correlate with either recessions
> or recoveries.
>
> Finally, the shorter-range chart combines actual and projected data
> to seemingly confirm the prediction. While the past data may be accurate,
> there is no basis for the projection and only a random luck chance
> that the projections will be accurate.
>
> Considering how poorly the current state of events was predicted,
> I won't be betting any of my own money on recovery this year.
www.wealthalchemist.co.../