Menzie Chinn reminds us of Casey Mulligan in October 2008:
My basic approach looks at the marginal product of capital… and at the wealth and substitution effects of the housing price crash…. I have plenty to say about how the economy will look a couple of years after the housing crash (in 2009 and 2010) but not much to say about the month-to-month or quarter-to-quarter path…. Because of the high non-residential marginal product of capital before and after the housing price crash, the incentive to save is strong, so the real U.S. non-residential capital stock should be significantly higher in 2009 and 2010 than it was in 2006 or 2007. Normally, three years would bring about 6% more real consumption -- and more with a high marginal product of capital -- but the housing crash had an adverse wealth on the order of -3%. So real consumption will be higher in 2009 and 2010 than in 2006 or 2007, but probably not 6% higher. Real GDP and employment will be significantly higher in 2009 and 2010, and so will unemployment, because of the shift in labor supply….
I don't have a model of month-to-month or quarter-to-quarter fluctuations…. With that said, the mechanisms emphasized in the medium term model do make some suggestions as to the dynamics…. [T]he financial sector needs a major reorganization, and the auto sector needs new, green, fuel efficient products. In the short term, employment and output will fall in both of those sectors… so GDP and employment will grow less (or shrink somewhat) in the short term….
NO DEPRESSION; NO SEVERE RECESSION: The medium term fundamentals point toward more real GDP, more employment, and (to a lesser degree) more consumption. Some employment and real GDP declines may occur in the short run, but they will be small by historical standards…. Barring a nuclear war or other violent national disaster, employment will not drop below 134,000,000 and real GDP [in 2000 dollars] will not drop below $11 trillion. The many economists who predict a severe recession clearly disagree with me, because 134 million is only 2.4% below September's employment and only 2.0% below employment during the housing crash. Time will tell….
Intrade.com's 2008 recession market gives more than a 70% probability of a 2008 "recession"… negative GDP growth for both Q3 and for Q4, because GDP growth was positive in Q2. Due to the hurricane, slightly negative GDP growth for Q3 is fairly likely. Negative real GDP growth for Q4 as well is possible. I cannot tell you whether 70% is the right number…. Intrade.com's 2009 recession market gives more than an 80% probability of a 2009 recession…. 80% seems too high.