June 03, 2005
No sign yet of recession
The probability that the U.S. economy is experiencing a new economic recession remains below 5%, according to the latest value of the quarterly real-time GDP-based recession probability index.
Based on the GDP figures released by the Bureau of Economic Analysis on May 26, 2005, the quarterly real-time GDP-based recession probability index stood at 3.4 for the fourth quarter of 2004. The index can be interpreted as the probability that the economy was beginning an economic recession at that date. This marks the sixth consecutive quarter that the index has remained below 5%, and confirms that the economic expansion that began in the first quarter of 2002 continues with no signs of weakness on the horizon at the present time.
This index uses the statistical principle known as Bayes Law to compare the recent behavior of GDP growth with the values that have been observed during historical recessions. Technical details of the construction and performance of the index can be found here
Posted by econbrowser at June 3, 2005 02:12 AMdigg this | reddit
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» James Hamilton joins the blogosphere from New Economist
It is always a pleasure to come across a new econoblogger of worth. A hearty welcome to James D Hamilton, Professor of Economics at the University of California at San Diego, who has just joined the blogosphere. So far his Econbrowser blog has covered ... [Read More]
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Tracked on June 13, 2005 12:07 PM
But could asset prices still burst?
Posted by: Rob Read at June 13, 2005 09:08 AM
I have to say that I am very excited about Dr. Hamilton now writing this blog and providing his views on current developments in the economy and finaancial markets. I have two comments to make about two of his recent posts, which I agree with.
First, I agree with his view that the Federal Funds rate is headed higher. In fact, I have written about and do expect that the Federal Funds rate is on its way to 4.0 percent between now and July 2006 assuming no unexpected shocks hit the market to derail the Fed. As the Fed continues to state, their stance on monetary policy remains 'accomodative' at present. That is, and especially with the continued stimulus building at the long end of the yield curve, the cost of capital for long-term consumption and investment decisions continues to remain very stimulative. In my view, the largest macro risks at present are in the housing sector and energy market. Real estate asset prices will correct in time and with respect to energy stock prices, Professor John Cochrane's work has shown us one simple finance fact: high stock prices imply lower expected future stock returns; especially from a sectoral perspective.
Second, I too expect energy prices to drop due to a slowing in the growth rate in demand and an increase in supply. In my opinion, books such as Hubbert's Peak are simply fueling the expectational fire at the moment much like many books in the late 1990s fed the Internet boom. It is my view that the market is simply demonstrating the Nobel winning work of Kahneman and Tversky at present, decision making under uncertainty, where investors continue to overweight the current information set in the energy market in an excessively bullish manner. Meanwhile, and on the Toronto Stock Exchange at least, many of the more speculative energy stock prices have dropped considerably during the past quarter along with the fact that liquidity has dried up considerably. Moreover, I met with a new IPO about 3 months ago and the Chairman advised me that their C$25 million IPO had Institutional demand for over $300 million of stock. My response was that fact was another signal that speculation in the energy market is far too high at present. Once energy prices drop, I expect the equity financing market to fall as well and many of the energy Trusts too will fall as many are reliant on high energy prices and financings to make their distribution payments to shareholders.
Finally, all one has to do is simply graph how cyclical energy prices and stock returns have been over the past to gain insight into this sector and detach from the view that 'this time it's different or a new world.' I can recall quite vividly how bullish energy price expectations were just before the collapse in energy prices during the late 1990s. Energy stock prices collapsed and so did the equity financing market at that time while the US economy remained in an expansion. Many Canadian energy companies went bankrupt due to the unexpected balance sheet shock as their working capital deficiencies could no longer get met through equity financings and firms did not have sufficient assets to pledge for debt financings. Thus, when energy prices drop, I expect that expectations will play a stronger role than fundamentals on the way down and that many financial market participants will look back and wonder what variables were influencing their bullish information sets in a continious manner in a discrete market....
Posted by: Kirby Thibeault at June 14, 2005 11:34 AM
Anyone familiar with the work of Douglas Reynolds and hotelling theory for explaining the bottoming of prices for non-renewable, hidden, raw materials just before they hit peak of extraction?
Posted by: Jason Bradford at June 16, 2005 05:28 PM
How dependent is U.S. consumer spending on the value of the dollar? What keeps the dollar from falling further? What do people make of the increase in Caribbean banks holding of U.S. treasuries?
Posted by: Jason Bradford at June 16, 2005 05:31 PM