Recession in 2006/7?

Well James Hamilton and Barry Ritholtz think it isn’t too far fetched. I must say the evidence Prof. Hamilton has listed is pretty impressive.

First, Prof. Hamilton does is go through the various attempts to try and model the dynamics of unemployment.1 He notes that all attempts have pretty much failed to come up with a reliable analysis that provides much in the way of prediction.
But he does not that there is an effect that economists call “duration dependence” which means that the probability of an contraction ending is a function of the length of the contraction. There is a similar effect for expansions, but only after an expansion has been underway for a while. So what does all that mean? Well the currect expansion has been underway for 14 quarters and that means that the probability of the expansion ending is going to start increasing the longer the expansion continues. Add on the fact that oil prices are rising, the real estate market is look pretty unstable, and that the Fed is slowly, but surely raising interest rates and the idea of a recession in the next 18 months to 2 years isn’t that hard to believe.

Anyhow I recommend reading Prof. Hamilton’s entire post, as well as Barry Ritholtz’.
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1Unemployment is only one of the time series that the NBER looks at in making a determination as to when a contraction starts or ends.

FILED UNDER: Economics and Business, General
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. TJ says:

    Naturally, our economy cannot (nor can anything else, excluding the universe itself?) grow forever … however I am not so sure I agree that the end of an expansion is the same as a recession.

    Or that if there is a recession it will be “BAD”, it might simply be “NOT GREAT”.

    Of course, I say that not having read the post yet …
    /TJ

  2. whatever says:

    I also haven’t read the post, but:

    – Isn’t there a joke about economists predicting 7 of the last 4 recessions?

    – Along the same lines of thought, there is an economist somewhere, every year, that claims that a recession is coming. Every once in a while one is right.

    So for these reasons I actually make it a habit to not read these sorts of articles.

  3. anjin-san says:

    No news here. The Bush economy is built on credit cards, both at the federal & houshold level. Sooner or later, the bills come due…

  4. Steve Verdon says:

    whatever,

    I think you are mistaken with regards to Hamilton. But believe what you want.

    Anjin-san,

    Whatever.

  5. anjin-san says:

    ….don’t worry about the deficit…. all is well….. keep moving along folks….. nothing to see here…..

  6. Steve Verdon says:

    Anjin-san, do you keep you head in your rectum for the warmth? Sheesh.

  7. LJD says:

    The Bush economy is built on credit cards…. at the household level.

    LOL I haven’t let G.W. use my card for weeks!