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.

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%.

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 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.

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.

Policymakers generally used their public appearances to discuss their recent QE3 and funds rate guidance decisions. 

This is from a commentary that was published on January 28, 2013.

The FOMC is on hold with respect to the funds rate guidance but very much in play with respect to its future plans for QE3.

There are many points of view on how QE3 will evolve and when it will end.

Enactment of the American Tax Relief Act of 2012 (ATRA) eliminated the near-term uncertainty surrounding tax policy, shifting attention to three other downside fiscal risks to our forecast.

Market participants often view economic growth as a guide to where interest rates should and will be.

We see the market (non-)reaction to the end of unlimited FDIC insurance as consistent with the notion that conditions in the financial market are gradually normalizing, which should help support the pace of economic recovery this year.

In the early hours of January 1, the House passed The American Taxpayer Relief Act of 2012 (ATRA), partly clarifying the view over the fiscal cliff.

On January 1, unless preventive legislation is enacted beforehand, the U.S. economy will be gripped by a fiscal contraction equal to 41/4% of GDP.

The size of the Fed's balance sheet hardly changed between mid-September-when QE3 started-and the end of October. What happened to QE3?

Rest assured, the Fed has been implementing QE3 as advertised. There are two reasons why the balance sheet was little changed last month.

As we approach the fiscal cliff, attention is focused on what the FOMC will do and say on the way to and possibly over the cliff.

The macro effects of the cliff would be far too large for the FOMC to offset over any reasonable period. The Chairman has said so repeatedly.

General Points

We expect that  some economic activity will be delayed several days or even weeks, but this is an intra-quarter story with no impact on Q4 GDP growth.

The value of property destruction itself is not a negative in GDP.

The outcome of this election will almost certainly affect the conduct of monetary policy.

In what must be one of the most dramatic shifts in policy positions in the history of the FOMC, President Kocherlakota changed teams today, moving from virtual “captain” of the “hawk team” to perhaps the new captain of the “dove team.”

President Kocherlakota said in a speech in May 2011 that, under

Monthly GDP rose 0.7% in July following a 0.2% increase in June that was revised up by two-tenths.  The sharp increase in July was more than accounted for by a large increase in nonfarm inventory investment.

The U.S. is experiencing one of the worst droughts in recent history.  While the farm sector directly accounts for only about 1% of the U.S. economy, the hit to farm output is likely to be large enough to have a noticeable impact on U.S. GDP.

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There have been numerous sharp, even intemperate, attacks on the Fed by politicians, principally by Republican members of Congress and presidential hopefuls.

[In his Jackson Hole speech, Monetary Policy since the Onset of the Crisis, Chairman Bernanke cited a Macro Advisers commentary from earlier this year written by Larry Meyer and Antulio Bomfim: "Not Your Father's Yield Curve: Modeling the Impact of QE on Treasury Yields." That paper is excerpted bel

[Note: This an an excerpt from an entry originally posted on April 14, 2011.

Monthly GDP was essentially unchanged in June, following solid increases in April (0.5%) and May (0.3%). The June reading reflected an increase in net exports that was just offset by decreases in domestic final sales and nonfarm inventory investment.

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Our long-term view on housing is straight forward: demographics will assert themselves at some point and imply significantly stronger housing demand and a faster pace of construction than in evidence today.

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The minutes of the June FOMC meeting noted that “several” members suggested that the Committee explore “new tools” to promote more accommodative financial conditions.

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Hysteresis and Monetary Policy

Chairman Bernanke and Vice Chair Yellen have recently talked about hysteresis.

In reference to labor markets, hysteresis is the process whereby cyclical unemployment becomes structural unemployment.

If the Fed were to do the twist again this year, it would not be like last year's (OT1): OT2 would be less powerful and more costly than OT1.

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The Senate today finally confirmed Jerome (Jay) Powell and Jeremy Stein as Governors of the Federal Reserve Board.

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Board Vice Chair Yellen gave a rich and wide-ranging talk on April 11. Her remarks centered on defending the FOMC's current policy stance, particularly the funds rate guidance.

This is from a commentary that was published on April 12, 2012.

Monthly GDP rose 0.4% in February following a 0.6% increase in January. The latter was revised up by four-tenths. The February increase was more than accounted for by a sharp increase in net exports. Domestic final sales posted a solid increase, while inventory investment slowed.

Data from the Quarterly Census of Employment and Wages (QCEW) suggest that the trend in employment growth recently has been somewhat stronger than indicated by the current official figures on payroll employment.

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