Manfred W. Keil, Ph.D., Robert Day School of Economics and Finance, Claremont McKenna College, 500 E Ninth St, Claremont, CA 91711 and James S.V. Symons, Ph.D., Economics, University College London, Gower St, London, WC1H 0AX, England.
Nearly all pundits agree that the recession, which began in December 2007, will see a steep decline in U.S. output in 2009. In this paper we present a forecasting equation which performs well according to the standard econometric criteria and has a standard error of forecast which is a little better than the RMSE of CGP farecasts back to 1986. The forecast for 2009 is grim but not disastrous: we predict growth of -0.5%, more or less the same as 1981 and 2000, and about the same as the 20% most optimistic of the CPO's panel of blue chip forecasters. We use the forecast model to classify the seven worst recessions since 1955, finding that falls in the value of household financial assets are the most powerful causes in five of them, including the present. In addition, we look at the relationship between the housing market and the financial crisis. Perhaps counter-tinuitive to some, we conclude that neither falls in house-prices nor mortgage-defaults are deflationary per se.