Sunday, December 02, 2007


The Recession News Barometer is Raising a Big Red Flag: The Role of Animal Spirits in the Coming Severe US Recession Nouriel Roubini Dec 01, 2007

There are plenty of forward looking indicators of economic recessions, including various asset prices (yield curve, risk spreads, equity markets, etc.), macroeconomic variables, the consensus of experts and analysts as well as more quirky indicators (such as sales of St. Joseph statues to indicate housing recessions, or sales of lipstick, a proxy for cheap make-up in tough belt-tightening times). Certainly many of these indicators are now pointing in the direction of a very high probability of a US recession in the very near term. US growth in Q4 may be closer to 0% than 1% and will, in my modest view, turn negative (recession) in H1 of 2008.
Last year, when I started to talk about the risks of a US recession in 2007, one unconventional indirect indicator of the risks of a recession that I mentioned and started reporting was the number of times the term recession was used in the news media (as measured by the numbers of mentions of the term “recession” in Google News).
This Google New Recession Barometer is of course not a scientific measure of the probability of a recession; but, as far as forward looking indicators are concerned, it is a pretty interesting one for a variety of reasons:
1 . it suggests how much media and analysts are concerned about an economic recession; so it is a proxy for the “wisdom of crowds”;
2. recessions can be, in part, self-fulfilling and due to what Keynes called “animal spirits” in the sense that, while weakening economic fundamentals are the crucial trigger of a recession the degree of confidence about the future of consumers, firms, investors is an important determinant of their economic decisions (how much to consume and invest in real capital) and their portfolio decisions (how much to shun risky assets because of increased subjective risk aversion). If consumers and firms become less confident about the future and worry about a coming recession they will behave in ways – cutting consumption and capital spending – that will reinforce such recessionary trends and increase the likelihood that such a recession will take place.

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