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September 12, 2007
Probability of U.S. Recession in 2008
A story in tonight's WSJ has economists upping the likelihood of a U.S. recession in 2008. Three-quarters of the 52 economists surveyed put the odds at or above 30%, but the range was gigantic from 5% to 90%. I put only teensy faith in what "up/down" economists -- I think that's Paul Krugman's phrase for market bingo-callers with no capital at risk -- have to say. That said, the likelihood of a U.S. recession is growing, and, credit crisis or no credit crisis, it's arguably somewhat overdue, with the current U.S. expansion now at the end of its sixth year. Either way, it's worth scanning a real market for the probability of a U.S. recession in 2008, and the one I use at Intrade says we are almost up to 60%.
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The only three economists that called this recession were Gary Shilling, Barry Ritholz, and Nouriel Roubini. Of course some of them just predict a recession every year and have been doing so for decades.
Paul -
I like intrade and prediction markets. These markets have been accurate on political forecasting. The trading in the recession contract is pretty thin. I think the better story is the disparity between experts and non-experts, as I note here:
http://oldprof.typepad.com/a_dash_of_insight/2007/09/misleading-rece.html
Yes, that's my concern as well. The volumes aren't high enough in economic markets at Intrade to give as much confidence as in their political markets...
The dilemma for the FED is that if they lower interest rates, it will cause a dollar weakness which will cause a sell off in the bond and broad market.
See my post
http://www.stockroar.com/2007/09/11/the-us-dollar-inflation-and-gold/