A Look at Recession Indicators

A couple of minor remarks on recession indicators.

First, Mark Perry noted the plunge in the price of the Intrade recession contract at Thursday's close. This seems to have represented a huge but transient move through the outstanding list of bid offers, with most recent trades at or above 50%. It's a reminder not to draw too much from such a thin market. Click to enlarge:

Note also that the Intrade contract defines a recession narrowly as two consecutive quarters of falling real GDP. If we eke out a barely positive growth rate for real GDP for 2008:Q1, that along with the anemic 2007:Q4 performance and a sharp drop in 2008:Q2 would probably qualify as a recession. But the Intrade contract would require negative growth in 2008:Q3 as well to qualify if we do see any kind of positive number for Q1.

Here at Econbrowser, we'll of course be making the final call on the basis of our own GDP-based index. Note in the side bar for the main page that I've decided to start referring to this as our "recession indicator index" rather than "recession probability index." That's a change in name only-- it's exactly the same index constructed in exactly the same way as it has been for the last three years. But I felt after explaining for the umpteenth time why it makes sense to associate a probability with an event that's already happened, that there would be greater clarity if I referred to this simply as a "recession indicator index." It has the same interpretation as it always has, namely, a probability that the economy was in recession as of the quarter previous to that for which the most recent GDP release is available. But for somebody who catches nothing more than the name, hopefully the new name will cause less confusion. Next update will be April 30.

Comments

[flyoverman]

Who cares about definitions... other than the media hype and then its effect on consumer confidence, which really does matter. The "R" word is over-hyped. "The only thing we have to fear is fear itself." - FDR

[Doug Roberts]

Hi -
I checked out your recession index and the language is confusing. It says 7.7% for Q3, 2007. Does that mean the index is not any more current than September 2007?
Love your columns.
Doug Roberts