Friday, August 01, 2008

P(Recession) on Intrade

CNN has the story of the latest news release on the slower than expected 1.9% annual growth rate. Intrade (pictured above) responded by increasing the probability of recession by 4.5% (up to 23.5%), however this represents a swing of just 2.5% from the price 48 hours ago. These are thin markets, so the previous drive up may have been some analysts at the BEA ahead of the announcement. That is pure 100% speculation, but I would do it if I was them.

Regardless, 1.9% economic growth is still far from the negative numbers needed to be called a recession by the Intrade definition, so over 20% still seems pretty high from my standpoint. However, I am not yet putting my money where my mouth is and trading (until I start getting some paychecks from the new job). For me, the big concern is the areas of growth and decline:
The increase in real GDP in the second quarter primarily
reflected positive contributions from exports, personal
consumption expenditures (PCE), nonresidential structures,
federal government spending, and state and local government
spending that were partly offset by negative contributions
from private inventory investment, residential fixed
investment, and equipment and software. Imports,which are
a subtraction in the calculation of GDP, decreased.
Nothing there sounds particularly good, as the main story seems to be investments in future productivity are declining. Keep in mind that the statement "Imports, which are a subtraction in the calculation of GDP" is a definition of an accounting relationship, not a behavioral relationship. It is definitely not the case, regardless of what Lou Dobbs tells you, that imports have made us poorer, because imports allow the other components of GDP to increase.


Thomas said...

Note that two negative quarters are not the official BEA recession definition:

In general usage, the word recession connotes a marked slippage in economic activity. While gross domestic product (GDP) is the broadest measure of economic activity, the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation. The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy. The NBER recession is a monthly concept that takes account of a number of monthly indicators—such as employment, personal income, and industrial production—as well as quarterly GDP growth. Therefore, while negative GDP growth and recessions closely track each other, the consideration by the NBER of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.

Justin M Ross said...

Thanks thomas, I changed the post to "Intrade definition".

SBVOR said...

The data say:
No recession.