Is the US recession scare over?

31st January 2012

The expectation here remains that the economy will grow respectably during 2012 but the data flow may turn more mixed near term, triggering renewed recession worries.

Fears reached a peak last autumn soon after a 30 September recession call by the highly-regarded Economic Cycle Research Institute (ECRI). The Intrade prediction market 2012 US recession contract topped at $5.0 on 10 October, implying a 50% probability of two consecutive quarterly GDP declines – see first chart. (The contract pays out $10 if the latter condition is met in 2012 and zero otherwise.)

A post in early October argued that a recession would be highly unusual against a backdrop of rapid real money expansion. 10 out of 11 post-war US downturns were preceded by a contraction of the real narrow money supply – second chart. The exception was the 1953-54 recession, apparently caused by severe fiscal tightening as defence spending was slashed after the Korean war.

The monetarist view seemed to receive support in late 2011 as economic news surprised positively, contributing to a fall in the Intrade contract. The implied probability rebounded towards 50% in mid December after the ECRI reaffirmed its recession call but has since collapsed to below 20% – first chart. (The contract closed last week at $1.86.)

Economic news, however, could turn less favourable near term, reviving recession nerves.

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