Recession rhubarb

In our last edition, we explained that when economists turn clairvoyants, they tend to disagree and add little value. This graph serves as proof.

It is hard to draw any meaningful conclusions about the probability of a US recession within the next 12 months, as the range of economists' predictions is too wide. The Financial Times wrote earlier this month that the "consensus view of economists" is that the probability of a US recession is now between 30% and 40%. Yet the graph suggests there is only mean consensus on the matter.

It shows large differentials between the predictions of economists from investment agencies and banks. Three prominent gnomes agree that the risk of a US recession in the next year is in the 40-50% range.

• Last month, former Federal Reserve Chairman Alan Greenspan said the odds have increased as falling house prices threaten consumer spending, but he said the chance of a hard landing was "less than 50-50.''
• Richard Syron, chief executive of Freddie Mac, the US government-sponsored mortgage company, believes there is a 40-45% risk induced by the housing market downturn.
• Last week, Lawrence Summers, an economics professor at Harvard University and treasury secretary under former President Bill Clinton, agreed there was a "50-50" chance of a recession due to high oil prices and the weak housing sector.

DIY calculations

The myriad homemade algorithms for calculating the likelihood of recession study the yield curve -- the difference between shorter-term and longer-term interest rates. Using a econometric tool on the Political Calculations website, which uses formulae developed by the Federal Reserve Board's Jonathan Wright in The Yield Curve and Predicting Recessions, The World Next Week calculated there was currently a 13.3% chance of a recession in the next 12 months.

An inverted yield curve -- produced when the 10-year treasury bond yield rate drops lower than the 3-month treasury's yield -- supposedly betrays an imminent recession. But one week ago, shorter-term rates fell dramatically in the wake of the Federal Reserve's rate cuts, while longer-term rates rose significantly. The net result: a steeper yield curve, meaning that the risk of a recession has receded. 

As Mickey D. Levy, the chief economist at Bank of America, wrote in the Wall Street Journal, "turmoil on Wall Street does not necessarily translate to contraction on Main Street." History agrees; the US economy continued to expand following both the stock market crash of 1987 and the 1998 financial crisis.

The US economy may or may not be resilient. But given its complex, probabilistic nature, it is futile to bet on its demise.