The Business Cycle Dating Committee of the National Bureau of Economic Research has yet to call an official end to the recession that began in December of 2007, but most forecasters (and at least one outspoken member of the Committee, Bob Gordon) now believe the recession ended around the middle of 2009. We believe the recession ended in either June or July, so that the economy has been expanding for about a year.

Early in the recovery many forecasters, concerned that the nascent expansion was fueled only by temporary inventory dynamics and short-lived fiscal stimulus, fretted over the possibility of a double-dip recession. Now, with the emergence of the sovereign debt crisis in Europe, that concern has re-surfaced. Certainly we recognize that the debt crisis imparts some downside risk to our baseline forecast for GDP growth. However, based on current, high-frequency data — most of which is financial in nature and so is not subject to revision — we believe the chance of a double-dip recession is small.

One way we assess these odds is with a simple but empirically useful “recession probability model” in which the probability of experiencing a recession month within the coming year is a weighted sum of the probability that the economy already is in recession and the probability that a recession will begin within a year. The former probability is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production. The latter is estimated as a function of the term slope, stock prices, credit spreads, bank lending conditions, oil prices, and the unemployment rate. Currently this model, updated through May’s data, estimates that the probability of another recession month occurring within the coming year is zero. (See Chart).

While ex post this model has a perfect record of predicting recessions, ex ante its predictions are only one factor we weigh when considering whether to introduce a double-dip recession into our baseline forecast. Still, the extremely low current reading is in notable contrast to readings during the early phase of the sub-prime crisis when the probability of recession flirted with 50% for a year before then finally rising strongly above that marker during the second half of 2007. At least by this measure, the economy appears to be in a less vulnerable position now than it was then.


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Monthly GDP rose 0.3% in January on the heels of a sharp, 1.0% increase in December. The January increase was more than doubly accounted for by a large increase in nonfarm inventory investment. Final sales declined in January, primarily reflecting declines in net exports, capital goods, and construction; PCE rose in January. The level of GDP in January was 4.4% above the fourth-quarter average at an annual rate.

There was a lot to like in this morning's report on the employment situation in February.

Nonfarm payroll employment rose 236 thousand, well above expectations. The unemployment rate declined two-tenths to 7.7%. The hours index rose five-tenths, reflecting both a solid increase in private employment (246 thousand) and an increase in the workweek. The breadth of the strength in employment was encouraging.

In this latest edition of our annual commentary, we look at how FOMC members moved markets last year.

In a departure from previous years, we examine the impact of FOMC participants' speeches on the ten-year Treasury yield (instead of the two-year yield). The two-year yield today is pinned down by the FOMC's very explicit funds rate guidance, which suggests no rate hikes over the next two years.

The Fed has been posting outsized profits in recent years and remitting them to the U.S. Treasury.

This is from a commentary that was published on February 22, 2013.

A sequestration of federal spending, scheduled to take effect on March 1, is now less than two weeks away.  Little progress has been made in negotiating a bargain that avoids or delays the automatic spending cuts implied by the sequestration.[1] Accordingly, we now put the odds of a sequestration at close to 50%, and rising.

Our baseline forecast, which shows GDP growth of 2.6% in 2013 and 3.3% in 2014, does not include the sequestration.

Monthly GDP rose 1.0% in December following a 0.2% increase in November that was revised up by two-tenths. Three-fourths of the December increase was accounted for by a sharp narrowing of the trade deficit in December; a solid contribution from domestic final sales accounted for most of the rest.

Yesterday Governor Stein provided a thought-provoking assessment of the credit market as a potential source of financial instability.

We see Governor Stein's remarks as consistent with the themes we developed in our most recent Rates Outlook commentary, published earlier this week.

This is from a commentary that was published on February 8, 2013.
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