There’s been plenty of talk in recent weeks that a recession is coming (or that we are already in recession). Indeed, the latest reading from InTrade.com suggests that there is about a 70 percent chance of a recession – defined as two consecutive quarters of negative economic growth – in 2008.
It is an interesting story, but today’s pessimism does not sit easily with the general optimism of macroeconomists over the past decade or so (a point made by David Leonhardt in the Times). Researchers have dubbed the period since the mid-1980′s “The Great Moderation,” arguing that while the business cycle may not have been beaten, it has certainly lost its bite. Careful studies of this transformation suggest that the ups and downs of the business cycle have been dramatically dampened since around 1984. Since then, nearly all measures of economic activity have become less volatile. The forces behind this moderation remain something of a puzzle, but they extend beyond monetary policy, and hence, this is not just a Greenspan effect.
The graph below shows that the amplitude of the business cycle roughly halved since the mid-1980′s. And yet the commonly-used yardstick of a recession (two quarters of negative economic growth) remains unchanged. This observation should give some optimism that even the confluence of several factors slowing the economy may not trigger a recession.
So this brings me to my question: are those who are using the R-word suggesting that the “Great Moderation” is over, or simply that we are facing an especially unusual set of adverse business conditions? Or was there never any real change in the structure of the economy, and the last couple of decades have been simply a statistical fluke?
My guess is that different answers to these questions can explain why some forecasters have divergent forecasts. But I have been surprised by the failure to speak directly to these questions, as the long-run implications of the competing explanations are important and very, very different.
and 
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So what does the Intrade number really mean? That a handful of people read the news predicting recession and decided to believe it? Intrade seems to be heavily influenced by people reacting to news events (remember the Obama/Clinton rise/fall after Iowa and N.H.).
I doubt that many Intraders have any special insight into matters they are betting on.
I suspect that with the ‘advent’ of the internet and electronic banking schemes, what we are actually seeing as that marginal competitive advantages that one firm holds over another are:
1 – Shorter duration. The time it takes to successfully co-opt, adapt to, or counter business competition is much faster.
2 – More complete information: Customer information is out there for anyone who wants it. Pricing information for competitor products/servces for nearly any arbitrary market in the country is out there. The data is there as well as the means to transmit it cheaply to firms.
Ha ha ha. I lived in Connecticut during the 1990-1992 recession – known as the “Great Recession” in the region – and it sure was news to everyone that the business cycle had moderated. It was a horrible, horrible time, one that I’ll never forget. It’s doubtful I’m alone in that respect.
Markets are all about communication, whether it be in spoken or written language or in currency. (I know there is more to it, but work with me..)
A friend tells me that one transaction involving gasoline used to last up to two months from the time the truck backed up to the pump until the time payment was received. This was just a few years ago. Now the whole transaction takes less than one day.
The current economy is much more efficient, although more volatile in some respects. Factories are less likely to produce type 1 widgets for six months whether they are needed or not. There are other examples… “Just in time” inventory. FedEx. Money, goods, and information flow more easily now.
I would hesitate to say that a recession “can’t happen”. More likely one industry tanks while another one ascends. There still could be an awful confluence of bad karma…
If we do go into a recession, the good news is that it is likely to be short. Between 1900 and 1975, we had recessions every few years — and they lasted a long time, some of them for years. During the last 30 years, we have only spent around 3 years in recession. The truth is that we have had it good, and we are now a bit sissified. If recession comes, let’s hope it follows the trend of the last few decades and doesn’t last that long.
Well it’s obvious we have video games now.
There were none before that the mid ’80s
The mid-’80s is when all the cartridge
games came out…and it’s been moderation
since then.
WELL… IN THE 2 DAYS SINCE THIS BLOG APPEARED, THE INTRADE MARKET FOR AN ’08 RECESSION HAS DROPPED 28%, 70 TO 55. LOOKS LIKE SOME ECONOMISTS ARE GETTING IN ON THE ACTION & TAKING ADVANTAGE THE PANIC.
The “Great Moderation” may be an artifact of the housing bubble. In 1983 for example, the house I was selling had a real estate appraisal that was down from 1982, in part because 12 out of 13 of the comparables were foreclosures.
The danger that we will have a super Mimsky moment when all asset classes are deflated is suggested by the size of the derivative market
that must be eventually settled or “unwound”.
According to a wikipedia entry, derivatives.
According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007).
Compared to 22 trillion in US mortgages.