Recession? In 2012-2013!

Is a new recession coming? This is currently one of hot questions in economic blogosphere. We expect it in 2012 and 2013. Our prediction is based on a quantitative growth model.

The first post in this blog was devoted to real GDP growth and its relation to the change in a specific age population. We have presented a number of growth models for various developed counties and validated them by new data. The original model  for the U.S. links the change rate of real GDP per capita, dlnG/dt, to the change in the number of 9-year-olds, dlnN9/dt, and the reciprocal value of the attained level of GDP per capita, A/G:

dlnG/dt= A/G + 0.5dlnN9/dt (1)

where A is an empirically derived constant. One can rewrite (1) relative to N9 and obtain the following equation in a discrete form:

N9(t) = N9(t-1)[2.0( dlnG - A/G) + 1] (2)

where dt=1 year.

Figure 1 presents the result of the N9 modeling between 1960 and 2005. The agreement between the measured and predicted N9 is excellent and we have shown that these time series are cointegrated. Our model has passed all rigorous econometric tests and can be used for GDP forecasts when the quality of population estimates is good enough.

Figure 1. Measured number of 9-year-olds in the U.S. and that predicted from real GDP per capita.

After 2003, the U.S. Census Bureau has been publishing extremely smoothed and thus biased population estimates, which are not appropriate for the purposes of real GDP prediction. This unfortunate situation might be resolved only after the 2010 census. We do not have quantitative estimates of the 9-year-old population yet but can use the age pyramid presented in Figure 2, which we borrowed from the U.S. Census Bureau.

At first glance, the 2008-2009 recession was induces by a negative value of dlnN9/dt, as one can judge from the number of 12- and 11-year olds. These people were 9-year-olds three and two years ago. One should not forget that younger cohorts accumulate more and more people with time due to intensive immigration and thus the numbers of people above 12 years of age are all biased up relative to the younger generations.

 

The number of 10- and 9-year-olds is slightly higher than in two older cohorts, and thus, we observe a period of positive real economic growth in 2010 and in 2011(the growth rate of real GDP per capita is about 1% per year lower than that of the overall GDP). However, the fall in N8 and N7 (male) almost guarantees a new recession in 2012-2013. Hence, a new recession is around the corner. We will present a more accurate quantitative estimate when the 2010 census data are available.