Monday, August 22, 2011

Let the Recession Begin?

Looks like it's on... We're likely headed for the 2nd recession, or so the data from the Philly Fed seems to indicate.
According to our calculations, the current index level translates into a recession probability of 82½% (see chart). It is interesting, though, that the Philadelphia Fed itself apparently tried to downplay the weakness of its own index, by emphasizing that “the collection period for this month’s survey ran from August 8-16, overlapping a week of unusually high volatility in both domestic and international financial markets.”1 Along the same lines, Dallas Fed President Richard Fisher told CNBC last night that while the Philly Fed Index is “a wonderful index” the stock market has in his view overreacted to the drop (“I think there’s a bit of an overreaction there.”)2 We agree and think that the move should be taken with a pinch of salt. The latest hard numbers – initial jobless claims or weekly chain store sales – do, after all, not suggest at all that the economic situation between July and August deteriorated as much as between September and October 2008.
The question is, how accurate are these predictions for the current situation?  UniCredit seems to think they're not terribly accurate a this moment but time will tell.

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