A minor attempt at fitting some factors to NBER's recession declarations:
Edit: Data-set available upon request, though most of the folks interested enough can DIY by going to federalreserve.gov and bls.gov
Model specification:
-Data used for the fit ran from Q2-1961 through Q4-2007. I think, based on the actual rates of GDP and PCE growth, that NBER jumped the gun on the Great Recession compared to past practice.
-The model is exceedingly simple, based on just the real Fed Funds rate, the spread between the 10yr Treas and the 3mo bill and the OECD's leading indicators, as well as one lagged term for the spread. The target is the NBER state 1 quarter in the future.
-The last readings, for Q4-2009, show a return to 0% and thus no "double dip".
-On the down side, all the recessions included in the training data were mostly "engineered" recessions of the Fed-pulls-the-punch-bowl variety. The GR is more directly comparable to a big asset bubble pop job like the GD. (Of course, there was a big bubble pop in 2000-2001.
Anyway, it was a fun game. Thoughts?
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-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
I'll take your word for it
(#205790)All I can add is "phew."
But to indulge my Cassandra side... I think we might be exposed to some foreign shocks that your model doesn't factor in. And sadly, I don't really see a robust and continuing political capability to do the right thing if something else bad happens.
"I don't want us to descend into a nation of bloggers." - Steve Jobs
NBER's definition of a recession
(#205775)isn't the standard two consecutive quarters of descending GDP. They look for contractions across the board: unemployment, real income, manufacturing, retail sales.
The transits in ReadFedFunds and to a lesser extent Spread(10-3) do point to your so-called Engineered Recessions, but at what point does NBER call it a recession? RealFedFunds are sorta recursive, since they're supposed to Greenspan's Rudder, and he was using some of the same numbers NBER uses.
The interesting part, to me, is watching the recession in utero. Each seems to have slightly different causes: the one I studied was Eisenhower's recession of 1953, caused entirely by a policy screwup.
It's instructive to note most of the early recessions were Panics.
I think you've reinforced a meaningful point,
(#205753)which is that this isn't an ordinary sort of event.
"A milk cow with 310 million tits" -- Alan Simpson, Barack Obama's co-chair on deficit reduction, describing Social Security.
I don't know that.....
(#205770)....it does or doesn't. The structure may or may not be appropriate, and I have no pre-WW2 data. I'm thinking about looking at non-U.S. bubble events.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentpre-WW2 data is useless in general.
(#205777)The relevant stats weren't well-kept.
"A milk cow with 310 million tits" -- Alan Simpson, Barack Obama's co-chair on deficit reduction, describing Social Security.
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parentBaffled
(#205717)I need a little more help figuring out why this is a "fun game."
You don't see the fun....
(#205719)....in trying to figure out if the recession will abate, continue or "double dip"? Sourpuss.
Edit: Possibly the confusion is the "game" bit? It's a toy model, and I'm not confident that the term structure of interest rates captures the dynamics of this particular recession well.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentI'm Innumerate
(#205749)And so I cannot make sense of what you have shared.
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parentAll the stuff in the second....
(#205772)....image is technical in nature and not necessary for interpretation, apart from the listing of model components. It's basically there to show I dotted my i's and crossed my t's, mostly. The red line in the upper graph is the model.
The big takeaway is that the last points in the model time-series (which are predictions) indicate a low risk of continued recession. The question that remains is whether a model that puts a lot of emphasis on the information contained in what interest rates are doing is valid in the current recession. If it is, then we would appear to be done with the recession and are moving into the recovery phase.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentStill cannot figure.
(#205929)Is this an attempt to define recessions?
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parentOh, no, those yellow bars....
(#205948)...are U.S. recessions, as defined by the National Bureau of Economic Research. (NBER) For good measure, there are two other time-series of Personal Consumption Expenditure (PCE) and GDP growth rates. Those are there to confirm (to me, anyway) that NBER's decisions as to when recessions are or are not present make sense.
The model (the bright red line) targets the likelihood of being in a recession one quarter forward. So it's basically trying to read NBER's mind, though it's plain that their decisions do correlate strongly with actual things that happen to the economy like negative GDP growth.
Edit: To expand, the little green arrows show spots where the model correctly indicated a rising likelihood of recession. The little red arrows show an elevated likelihood of recession that, per NBER, never rose to such.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentIf I understand (and I may not) he's hunting for the factors
(#205947)or at least some significant ones, which go into the soup. Sort of reverse-engineering the underlying complexity of NBER's pronouncements. When NBER says it's a recession, it's a matter of some controversy, but they're always taken seriously.
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parentYes.
(#205952)Though the deeper purpose is to capture whether or not economic conditions are improving, with "reading the NBER's mind" as a proxy for this. I could just as easily target GDP or employment growth directly (and I'm working on just that), but NBER recessions gave a nice, clean yes-or-no that was tractable for a logistic regression, as well as a commonly understood way of saying "the economy sucks".
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentInteresting. Keep working on it.
(#205987)I never got much beyond one semester of economics in school: my education was mostly practical. I track markets without looking at the "Larger Picture", mainly because I don't have a ready, applicable yardstick (I understand) against which to track one market in a sea of markets.
I do have one rough and ready inflation calculator, averaged futures commodity prices. I pretend I have $100m, buying $10M each of the top ten traded near-term physical commodities contracts. Every day the prices change, every day I sell winners and buy losers to re-equalize. The sum of changes becomes an inflation/deflation index.
In this world of near-perfect liquidity, I can see the ebb and flow of the tide of inflation. The object isn't to make money, though you could, by betting on this physical commodities index.
Though stock prices may fall to zero and markets can go limit up or down, futures commodity prices will never go to $0 while the market exists. Even the cheese contract trades at MERC, with a whiteboard and markers, and a few phones.
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parentBut the date doesn't extend beyond 2008, Bernard.
(#205978)What's the time series (I can't read the graph but it seems to end in 2008 or is it 9)?
I'm not getting this. Are you saying we're "not in recession" now?
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parentIt ends in 4th Q 2009
(#205983)as he mentioned in his notes. The problem is that he's comparing intentional Fed monetary policy induced recessions to a banking crisis and excess debt induced recession. Cooling down inflation in an overheating economy is quite different from refloating the entire financial system.
I blame it all on the Internet
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parentThen again....
(#205996)....for the factors that I plotted above, nothing stands out as being atypical of the rest of the population of recessions. It's just bigger than most, akin to the multi-recession Time of Troubles in the late 70s/early 80s. I added basic DoL unemployment yesterday, so I should update the image.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentSo far
(#206027)Don't get me wrong, I have no intention of creating a model like you have - I prefer my masochism straight up. But I think that using selected factors that are important to finance but not use factors that are more broadly applicable (like unemployment as you mentioned) will likely give some, let's say, counter-intuitive results.
I blame it all on the Internet
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parentThat's kind of his point.
(#206043)This is a hardcore monetarist model -- recessions are caused by central banks, in order to avoid worse consequences.
"A milk cow with 310 million tits" -- Alan Simpson, Barack Obama's co-chair on deficit reduction, describing Social Security.
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parentKeep in mind....
(#206089)...that a fair part of the recent improvement is related to the swing in the OECD LI. So it isn't strictly monetarist. More "data-mining-ist".
Also, I need votes, people! If you want serious discussions of the economy, well, there you go. FP this sucker!
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentRight
(#206082)but as I mentioned above, I think this one was caused by reaction by central banks to flood the market with liquidity not reduce it as in the past.
I blame it all on the Internet
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parentYou lost me there, Hank.
(#206090)The flood of liquidity did what?
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentIn most recessions
(#206098)the central bank tightens up to reduce liquidity because they're concerned about inflation. The current episode saw them creating capital like crazy and take debt off the markets and onto their own books to avoid deflation. So the reasons for and reactions to the current recession are quite different than the "ordinary" ones you're comparing it to in the past.
I blame it all on the Internet
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parentRight, but that wasn't a cause.
(#206138)It was an effect. Still, I agree in a general sense that this is not a "punchbowl" recession -- it's a pendulum swing in debt.
"A milk cow with 310 million tits" -- Alan Simpson, Barack Obama's co-chair on deficit reduction, describing Social Security.
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parentYeah.
(#206161)You might agree or disagree with the reaction, but that it was. Of course, an Austrian might state that what the flood of liquidity is doing is setting you up for the next crash.
-“It is unwise for the government to tell people how they can spend their money” - Barney Frank, Chairman House Financial Services Committee, on on-line gambling, 2009
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parentSure,
(#206175)but Austrian economics is, at the end of the day, a religion and not even really a philosophy. There's never any testable hypotheses.
At least the neoclassicals were wrong.
"A milk cow with 310 million tits" -- Alan Simpson, Barack Obama's co-chair on deficit reduction, describing Social Security.
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parent