Double-dip risks: Update

This post was written by Simon van Norden of HEC-Montréal.

About a month ago I mentioned my scepticism about the high odds that some forecasters were assigning to the risks of a “double-dip” recession in the US. I summed up that post this way:

So what should a macro-wonk conclude from all this?

·       Compared to what other forecasters have been saying, Goldman-Sachs' 25% odds look very high.

·        Most forecasters think downside risks are low on average and low for an early recovery phase.

·        These same forecasters tend, if anything, to overestimate the downside risks after a recession.

The caveat I'm keeping in my mind is

·        The SPF numbers were released two months ago and the data have not been strong since; I'm interested to know what the new numbers will look like in four weeks.

The data that we’ve had in the interim has not been especially strong, so I was interested to look at the 2010Q3 results from the Survey of Professional Forecasters, which were released on Friday. Not surprisingly, forecasters are now more pessimistic:

The forecasters have revised downward their estimate of the probability that growth will fall into the range of 3.0 to 4.9 percent in 2010, 2011, 2012, and 2013.

How bleak has the outlook become? Table 4 in the survey gives the probabilities that forecasters put on a decline in real GDP, quarter by quarter:

Quarter	2010Q3	2010Q4	2011Q1	2011Q2
Mean Probability	14%	17%	17%	15%

That first number is gloomier than the 9.8% odds for 2010Q3 reported in the previous quarterly survey. It’s still only about half the Goldman-Sachs 25-30% estimate that motivated my original post. It’s also well below the average 31% probability I cited before that forecasters typically give to recession probabilities at this point in the cycle.

On the whole, this makes me think that the risks of negative real output growth in the US over the next year are not particularly high; not in absolute terms, nor relative to historical averages, nor for this point in the cycle, nor after taking the disappointing recent data releases into account.

(If you want to build a case for such pessimism, I think you’ll have better luck if you define real output growth relative to potential output growth, or you focus on the growth in US employment.)

Comments

[Min]

If we assume that the probability forecasts are independent, then we get a probability estimate of 50% that there will not be a negative real growth quarter among the four. But surely the forecasts are positively correlated, so the combined forecast of no negative real growth quarter lies between 50% and 83%. :)

[Andrew Jackson]

The bond market sure seems to be signalling an extended period of stagnation which presumably significantly raises the odds of a double dip.
http://www.progressive-economics.ca/2010/08/19/is-the-bond-market-saying-that-capitalism-has-no-furure/