Forecasts And Output Gaps In The Wake Of Covid-19 (As Of Early March)

Mar. 09, 2020 10:12 AM ETSPY, QQQ, DIA, SH, IWM, TZA, SSO, TNA, VOO, SDS, IVV, SPXU, TQQQ, UPRO, PSQ, SPXL, UWM, RSP, SPXS, SQQQ, QID, DOG, QLD, DXD, UDOW, SDOW, VFINX, URTY, EPS, TWM, SCHX, VV, RWM, DDM, SRTY, VTWO, QQEW, QQQE, FEX, ILCB, SPLX, EEH, EQL, QQXT, SPUU, IWL, SYE, SMLL, SPXE, UDPIX, JHML, OTPIX, RYARX, SPXN, HUSV, RYRSX, SCAP, SPDN, SPXT, SPXV

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Summary

No major economics agency or group has forecasted a recession in their baseline.
However, forecasts are definitely being marked down.
While no recession is forecast (Goldman Sachs has 0% growth in Q2, Deutsche Bank barely negative), the output gap goes negative in the GS baseline (using the CBO estimate of potential).

Editor's note: This article was originally published on March 8, 2020, by Menzie Chinn here.

No major economics agency or group has forecasted a recession in their baseline. However, forecasts are definitely being marked down.

Figure 1: GDP as reported (black), CBO January 2020 projection (blue +), Goldman Sachs baseline forecast (pink +), CBO estimate of potential GDP (gray), HP filter applied to 1986-2019 (brown), SAAR, in billions Ch.2012$, all on log scale. Source: BEA 2019Q4 2nd release, CBO Budget and Economic Outlook, Goldman Sachs (March 4), and author's calculations.

While no recession is forecast (Goldman Sachs has 0% growth in Q2, Deutsche Bank barely negative), the output gap goes negative in the GS baseline (using the CBO estimate of potential).

Figure 2: Output gap using CBO January 2020 potential (gray), Goldman Sachs baseline forecast relative to CBO January 2020 potential (pink), HP filter deviation applied to 1986-2019 (brown), and Hamilton filter deviation applied to 1986-2019 (green). Source: BEA 2019Q4 2nd release, CBO Budget and Economic Outlook, Goldman Sachs (March 4), and author's calculations.

Here is Goldman Sachs's decomposition of the impact.

Source: Goldman Sachs, March 4th, 2020.

And here is Deutsche Bank's, including a "worse case" (not "worst case")...

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Econbrowser

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James D. Hamilton has been a professor in the Economics Department at the University of California at San Diego since 1992. He served as department chair from 1999-2002, and has also taught at Harvard University and the University of Virginia. He received a Ph.D. in economics from the University of California at Berkeley in 1983. Professor Hamilton has published articles on a wide range of topics including econometrics, business cycles, monetary policy, and energy markets. His graduate textbook on time series analysis has over 14,000 scholarly citations and has been translated into Chinese, Japanese, and Italian. Academic honors include election as a Fellow of the Econometric Society and Research Associate with the National Bureau of Economic Research. He has been a visiting scholar at the Federal Reserve Board in Washington, DC, as well as the Federal Reserve Banks of Atlanta, Boston, New York, Richmond, and San Francisco. He has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress. _________________________________________________ Menzie D. Chinn is Professor of Public Affairs and Economics at the University of Wisconsin’s Robert M. La Follette School of Public Affairs. His research is focused on international finance and macroeconomics. He is currently a co-editor of the Journal of International Money and Finance, and an associate editor of the Journal of Money, Credit and Banking, and was formerly an associate editor at the Journal of International Economics and the Review of International Economics. In 2000-2001, Professor Chinn served as Senior Staff Economist for International Finance on the President’s Council of Economic Advisers. He is currently a Research Fellow in the International Finance and Macroeconomics Program of the National Bureau of Economic Research, and has been a visiting scholar at the International Monetary Fund, the Congressional Budget Office, the Federal Reserve Board and the European Central Bank. He currently serves on the CBO Panel of Economic Advisers. With Jeffry Frieden, he is coauthor of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (2011, W.W. Norton). He is also a contributor to Econbrowser, a weblog on macroeconomic issues. Prior to his appointment at the University of Wisconsin–Madison in 2003, Professor Chinn taught at the University of California, Santa Cruz. He received his doctorate in Economics from the University of California, Berkeley, and his AB from Harvard University.

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