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Economic update
On Intrade.com, the probability of a formal recession (two successive quarters of negative growth) in 2008 has fallen from the 70 percent range to the 30 percent range.
Some time ago I had proposed "the N word" economic indicator, namely that things would be really bad if lots of people were talking about the idea of nationalizing the banks. That hasn't happened and indeed the people who predicted widespread solvency problems seem to have been wrong.
Paul Krugman has had numerous good posts on the Ted spread as an indicator of ongoing problems in financial markets. I'll say this: during the Great Depression no one had to cite a spread to convince anyone that things were going very badly.
Economic knowledge is always subject to revision, but so far the evidence points in the direction of a mild recession, in the informal sense, and that The Great Moderation is still with us.
Posted by Tyler Cowen on May 4, 2008 at 07:48 AM in Economics | Permalink
Comments
In a not altogether unrelated development, the second Harold and Kumar movie is excellent (if you like that kind of thing at all) and one of the most libertarian films I've seen, ever. It is extremely politically incorrect, however, which in part explains its mediocre reviews.
Posted by: Tyler Cowen at May 4, 2008 7:54:17 AM
Jus when dudez was looking to ban the N-word from rap music, you have to go an' resuscitate that gar-bage for economic analysis.
Seriously, this move is retrograde, atavistic, reactionary, debased, immoral, loutish, uncouth, gauche, maladroit, disrespectful, unrefined, crude, cruel, craven, crummy, ill-considered, unwarranted, cynical, sinister, simple-minded, puerile, hostile, low-style, low-class, insolent, indolent, impudent, mean, mediocre, mealy-mouthed, weak-willed, pig-headed, logorrheic and silly.
Also, I don't like it.
Posted by: ck at May 4, 2008 9:21:17 AM
FWIW, I can remember that a few of us predicted here that the "sub-prime" crisis was more than that, and would echo out as far as ... the example I and others used was "student loans."
Well, from Business Week:
Action taken by the Federal Reserve on Friday targeting the global credit crisis, in concert with European central banks, included an injection of cash into the stricken student loan market through a special lending operation.Lawmakers and the student loan industry have been pressing for such action by the central bank for weeks, as distress in the credit markets has caused more than 60 lenders to stop making federally guaranteed student loans, either temporarily or permanently.
... our societies' mad debt love has had consequences.
Posted by: odograph at May 4, 2008 10:24:00 AM
I don't know. Recall the Wall Street Journal article ("Bankers Cast Doubt On Key Rate Amid Crisis", 16 April 2008) that questioned the accuracy of bank reported borrowing rates. It seems like insolvency, in the worst case, would be a motive for banks to misrepresent their borrowing costs showing up in LIBOR.
How long can the psychological gambit of misinformation in employment, inflation and borrowing costs keep the economy afloat?
Posted by: ideogenetic at May 4, 2008 11:06:00 AM
If you talk to people small midwestern towns you don't need a spread to tell them things are going badly--and I mean this in terms of things going worse than they already were. I think Krugman's citing spreads just to convince the people who are doing well enough for themselves that they can't really tell there's a recession...
Posted by: CJS at May 4, 2008 1:08:29 PM
If you talk to people small midwestern towns you don't need a spread to tell them things are going badly--and I mean this in terms of things going worse than they already were. I think Krugman's citing spreads just to convince the people who are doing well enough for themselves that they can't really tell there's a recession...
Posted by: CJS at May 4, 2008 1:08:58 PM
small midwestern towns
Small midwestern towns have a long-standing reputation for economic hardship.
Posted by: Constant at May 4, 2008 7:51:50 PM
I was reading this morning that (1) the Fed is accepting bonds backed by auto loans, a far cry from their old preference for treasury securities, and (2) auto loan defaults are at a 17 year high.
Fully a quarter of those with auto loans are underwater, average loan duration is 5+ years, as they face a credit crunch and high gas prices.
It sounds a little early to call the final damage for this recession.
Posted by: odograph at May 5, 2008 9:21:04 AM
Thats good news about Harold and Kumar!
Posted by: josh at May 5, 2008 10:04:55 AM
We are entering the eye of the credit crisis hurricane. I don't think anyone who has seen the CSFB chart of resetting loans or the chart of the current real estate prices vs. the early 90s California real estate prices thinks we are anywhere near our worst point.
That said, are we in a recession? If so is the recession over? If you use per capita GDP, we have been losing ground for the last year or so. We add about 1-1.5% to population every year - therefore for per capita GDP to grow, YoY GDP must be larger than 1.5%. So my vote is that we have been in a very slight recession for about the last 4 months or so.
Now, is the recession over, or will it last longer? Will it get deeper? My vote is no, yes, and yes. This is due to the fact that lots of the losses in the real estate market haven't been realized yet, but are only paper losses at this point. Until they are realized, the recession will not be over.
Posted by: mickslam at May 5, 2008 1:09:49 PM
I think the 'evidence' being relied on isn't as solid as some people think.
Posted by: Rick at May 5, 2008 1:35:53 PM
I predicted avoiding a recession on this blog-I bought stocks.
I also predicted Ron Paul as president-Didn't buy any InTrade contracts.
So, either I'm wrong on both, or I'm a better financial prognosticator than political pundit. Of course I have not skin in the political game and more emotional investment.
Posted by: Andrew at May 5, 2008 5:15:39 PM
Here's one reason I think we aren't in a recession: Everyone thought we were in one.
When everyone was saying we were in a recession, that provides a lot of cover for people to go ahead and fudge their numbers to the loss side. We aren't seeing across-the-bard losses.
Leading indicators are okay, and coincident indicators seem to indicate that what damage was to be done has been done. We have 0.6% growth in the first quarter, so if the recession is already over, then it never happened, by the standard definition.
However, now that people are starting to think the worst is over I'm starting to get worried.
Posted by: Andrew at May 5, 2008 5:29:22 PM
