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Recession coming according to prediction markets

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Recession coming according to prediction markets

Recession coming according to prediction markets

“a recession is defined as two successive quarters of negative real GDP growth…. based solely on the data reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, "Percent Change From Preceding Period in Real Gross Domestic Product") as reported by the BEA.”

Business cycle measurement

Business Cycle Measurement

  • Techniques developed by the NBER in the early 20th century

    • W. C. Mitchell and Arthur Burns, Measuring Business Cycles (NBER) available at

  • Current semi-official arbiter of recessions is the NBER Business Cycle Dating Committee

    • see

Recession coming according to prediction markets

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

“Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs.

“The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, the committee refers to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The committee also looks at monthly estimates of real GDP.”

(NBER Cycle Dating Committee at

Alternative definition

Alternative definition

Some economists don’t like the NBER definition (“dog’s breakfast”).

A major alternative: two consecutive quarters of negative real GDP growth: Calls 8 of 10 recessions in post-war period (one false positive; two false negatives).

Blue line is quarterly growth rate.

Red lines/dots are periods in which at least two consecutive quarters had negative growth

Other critiques

Other critiques

All real and no nominal variables (like inflation)

Why do recessions refer to output, not difference of output from trend, or per capita output?

No notion of amplitude or duration

- should have something like category I through V hurricanes

Is there some kind of “regime change” or “change of state” between contractions and expansions?

Recession measures as gap

Recession measures as gap

An alternative approach is to consider a recession as a period when actual output is below potential output (this being a GDP “gap”, illustrated above).

Recession severity index percentage point years

Recession severity index (percentage-point-years)

2008 is WSJ forecast of 10/08 for low; more severe recession for high.

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