A model maintained by the Federal Reserve shows that the odds of a recession jumped dramatically last month. This model is based upon current economic data and statistical techniques designed to identify turning points in the economy. It has correctly identified all recessions since the 1970s and the model has never given a false signal.
At the end of October, the odds of a recession increased to 20 percent. In the past when this model has reached 20 percent, a recession has invariably followed. Unless this time is different, it is very likely that a recession has already begun.
The stock market decline following President Barack Obama's re-election and the looming fiscal cliff both point toward the reality that an economic slowdown is likely. Stocks have historically fallen 20 percent or more during a recession.
The fiscal cliff will most likely be resolved through a combination of tax increases and small decreases in government spending. Any increased revenue, as House Speaker John Boehner referred to tax hikes, will most likely lower consumer spending and slow economic growth. In the short term, declines in government spending also decrease economic growth, although there are significant long-term benefits to spending cutbacks.
Interest rates add to the weight of the evidence that an economic slowdown is likely. Long-term rates have fallen back toward their all-time lows. This would be expected during a recession.
Obama is undoubtedly facing economic challenges in his second term. These challenges include the strong possibility of a recession and recent economic data indicate that a recession should come sooner rather than later.
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