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Probability of a recession: Is it really 1 in 3?

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Tuesday, August 09, 2011


Larry Summers recently wrote in the Washington Post:

On the current policy path, it would be surprising if growth were rapid enough to reduce unemployment even to 8.5 percent by the end of 2012.... With growth at less than 1 percent in the first half of this year, the economy is effectively at a stall and facing the prospects of shocks from a European financial crisis that is decidedly not under control, spikes in oil prices and declines in business and household confidence. The indicators suggest that the economy has at least a 1-in-3 chance of falling back into recession if nothing new is done to raise demand and spur growth.

Summers is a voice to be respected. He is a top-notch economist who has served as Treasury Secretary and President of Harvard. How do I assess his view?

He's probably too gloomy. The more time people spend in Washington, they more importance they give to public policy. I'm enough of a Keynesian to think that fiscal policy matters a little, but it generally matters far, far less than newspaper headlines would suggest, and much much less than Beltway economists think.

He's right about the risk. I'm not saying the odds are 1 in 3, but what if the true odds are only 1 in 10?  I say "only" 1 in 10. You have insurance for risks far less probably than 1 in 10 (death, auto accident, fire, etc.)

What should business management due about economic risk? I've suggested a process for economic contingency planning. I suggest that every business, government agency and nonprofit convene its management team and board and do some contingency planning for the possibility of another recession.

However, my best forecast right now is that growth will accelerate enough to avoid a recession; not enough for us to feel good about the economy this year or next, but enough to avoid a recession. But I've been forecasting long enough to be humble about my ability to predict the next recession.

Bill Conerly is a Portland economist and author of the Businomics Blog.



Bob Brown
0 #1 Right on!Bob Brown 2011-08-09 11:55:33
"The more time people spend in Washington, they more importance they give to public policy."

So true.
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Martha Perez, General Political Activist
0 #2 Glass-Steagall (YES, policy still matters)Martha Perez, General Political Activist 2011-08-09 12:04:12
Glass-Steagall separation of commercial banks from the brokerage and insurance sectors. Such a bill has already been introduced into Congress by Marcy Kaptur in the form of HR1489, which already has significant support on a bipartisan level. A minimum of $17 trillion in Wall Street gambling debts, foisted on American taxpayers, would be thus charged back. With that gambling debt removed from the Federal government ledgers, Congress could immediately proceed to issue Federal credit for vitally needed infrastructure projects, like the North American Water and Power Alliance (NAWAPA), that would immediately create millions of productive jobs.
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Michael Vaughn
0 #3 Michael Vaughn 2011-08-09 19:13:20
The trouble with predicting and knowing is we will not know when we are in a recession until the economists and the media tell us we are in one.

There are way too many variables that plug into way too many formulas that give the lay people goose bumps.

My prediction: If I have a job and my neighbor has a job – no recession. If we don’t – recession.

I agree, contingency planning is a must, but first we need SMART business leaders who are able to think, plan, and strategize for different economic scenarios. I have not seen very many of this type; just those who think they are leaders because they are in charge.
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