Friday, October 26, 2007

Chris Varvares predicts 25% chance of 2008 recession

We do assume that housing starts trough at 1.18 million units and remain near there through 2008, and we have a 6% nominal, 11.3% real decline in house prices, and push that through personal consumption expenditures via a traditional wealth effect. We still don’t get a recession. It is interesting to compare the current episode to the last recession. Both had one component of fixed investment that was in a sharp decline and hits to wealth from stock prices in 2000, and from house prices presently. This comparison is shown in the chart below. The direct drag on GDP growth from declines in fixed investment are similar, at least in the peak effect (given the expected trough in starts), but the wealth effects are dramatically different!

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