Wouldn't we like to know: Will we have a recession? And if we do, how bad will it be?

A recent International Monetary Fund (IMF) study looks at past financial collapses and asks which ones are likely to lead to broader economic contractions. The IMF study is here. A short New Yorker article about the study is here. The following is an excerpt from The New Yorker report:

Wall Street and the Real Economy

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Even if the credit markets loosen soon, will that lead to rapid recovery in the real economy? For the great majority of Americans who live on paychecks, not dividends or bond interest, the most important questions are: What will happen to employment and household incomes? Will we have a recession—and if so, how long and deep will it be?

My colleague Sherle Schwenninger directed me to a study tucked inside the International Monetary Fund’s recently published “World Economic Outlook”. It appears as Chapter Four, under the title, “Financial Stress and Economic Downturns.” The I.M.F.’s economists analyzed 113 episodes of financial stress—stock-market crashes, property crashes, and currency crises—over the past thirty years, in seventeen industrialized countries—Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the U.S. In twenty-nine of the 113 cases, a recession followed the financial turmoil. In twenty-nine other cases, there was an economic slowdown that fell short of a contraction. In fifty-five cases there was no significant loss of economic momentum at all.

The I.M.F. authors crunched comparative data and reached a few conclusions about these varying outcomes. Financial turmoil involving banks and bank solvency is more likely to produce a recession than is turmoil limited to the securities or foreign-exchange markets. Spikes in house prices and increases in household indebtedness before an episode of financial turmoil also appear to be “associated with sharper downturns in the aftermath of financial stress.”

Unfortunately, that looks like our bingo card. The financial, credit, and asset-price patterns in the United States leading up to this autumn’s stock-market crash, the I.M.F. economists concluded, “appear similar to those of previous episodes that were followed by recessions.” They see “a substantial likelihood of a sharp downturn in the United States.” (They think Europe may get off a little easier because European households are not in as much debt as their American counterparts.) There are some mitigating factors in this forecast. American corporations entered the crisis with relatively low debt levels, which could help on the employment front—if, that is, those corporations can find someone to lend them short-term money to fund their payrolls.

Volatility and noise on Wall Street is sometimes only that. This time, however, it looks as if many tens of thousands in the lower and middle rungs of the American workforce—following years of stagnating or declining incomes—now face a period of joblessness, sustained anxiety, and disruptions to their families. No wonder there’s anger in the air.