Interesting comment here from Goldman’s Andrew Tilton:
- Why do market participants seem less concerned this time around, and are they right to be? An update of our recession forecasting models suggests a low probability that the economy falls into recession in a few months’ time, in contrast to summer 2011–when the estimated probability was more than 1 in 4. Leading indicators that look better this time include 1) housing activity, which is on a much better trajectory this year, 2) oil prices, which are roughly unchanged over the past year in contrast to a dramatic run-up in the winter of 2010-11, 3) the equity market, which fell less and has rebounded more quickly.
- One likely reason why stock prices and broader financial conditions have done better recently is the expectation of monetary easing by major central banks. Should that expectation be disappointed, markets would likely react negatively, pushing up the models’ estimated recession probability. Another potential downside risk not captured in our near-term models is the possibility of a sharp fiscal tightening at yearend. A hypothetical scenario including both of these events—a modest equity market correction and sharp fiscal tightening of roughly 2% of GDP—generates a six-month recession probability close to 50% by early 2013. If the full effect of the “fiscal cliff” takes place, the probability rises well above 50%.
This chart shows Goldman’s recession forecasting model looking still pretty benign.
Photo: Goldman Sachs