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Friday, December 21, 2007

Kasriel: 65% Chance of Recession

by Calculated Risk on 12/21/2007 09:16:00 PM

Northern Trust's Director of Economic Research Dr. Paul Kasriel's model is putting the odds of recession at 65.5%: Probing the Probabilities of a 2008 Recession

Kasriel Recession ProbabilitiesClick on graph for larger image.

This is Chart 2 from Kasriel's piece:

What is the probability that the U.S. economy will fall into a recession in 2008? We would answer, 65.5%. The bases for our answer are the Kasriel Recession Warning Indicator (the trademark-pending KRWI) and an econometric technique known as Probit modeling. ... Since the late 1960s, every recession ... has been immediately preceded by or accompanied by both of the KRWI variables in negative territory. The KRWI has not given a false qualitative signal – i.e., it has not predicted a recession when one did not occur. Aside from its impressive track record in identifying recessions, the KRWI has another attractive attribute – its variables are not subject to much, if any, revisions. For a theoretical explanation of the KRWI see, The Inverted Yield Curve - Is It Really Different This Time?.
There is much more in the piece. See Kasriel's comments on the stock market (page 4, chart 4).