Recession Probabilities

Mankiw opines on the recession risks:

Real gross domestic product increased at an annual rate of 0.6 percent in the first quarter of 2008.

Over at intrade, the probability of a recession in 2008 has fallen to 25 percent in the latest trade.

I'm too lazy to dig through my old posts, but I always felt like intrade was probably over-estimating the likelihood of a recession. Don't get me wrong, I think we will be in one by mid-year, if we're not in one now, but that's because I define the recession as simply output falling below potential output, and rely mostly on the NBER for the dating. inTrade, though, was using the journalistic shorthand definition of a recession - two consecutive quarters of negative economic growth. You can be in a recession and not have negative growth. In fact, the 2000/2001 recession was just such a recession.

Once we passed the first quarter, intrade investors had to update the likelihood because before, they had to only get 2 consecutive quarters of negative growth which gave them Q1-Q2, Q2-Q3, or Q3-Q4. Anyone of those would be a winner. Now that Q1 had 0.6 growth (assuming it's not updated down later, which isn't unlikely at all), it's only down to Q2-Q3 or Q3-Q4. Not sure what those probabilities come out to be, but it's the joint probability of each, which of course requires it be updated down after Q1 was positive. That said, I'm still pessimistic, but I knew that contract was way too high. Of course, if this turns out to be the "worst recession since the Great Depression," like everyone's saying, that's not at all crazy to think. But I'm more worried about a sustained slump than I am about a severe temporary shock.