This article first appeared in the St. Louis Beacon, Jan. 2, 2009 - The start of a new year always brings the promise of change. After 2008, we really need it. A new year also brings out the perfunctory prediction column. Instead of putting my reputation on the line, I will let the market make the prediction.
Future markets provide predictions about financial assets and commodities. But in other markets , traders place bets on where the stock market averages will go in 2009, or whether GM will even exist by year’s end.
One of these electronic markets is Intrade. Founded in 2001, Intrade allows traders to bet online as to the outcome of non-sports related events. Traders can take a long position, betting that the event will happen, or they can short the contract, betting that it will not. With contract prices ranging from 0 to 100, the contract’s current price is the market-determined probability of the event occurring.
So, what do the Intrade investors see in their collective crystal ball? (Oh, I’ll add my 2 cents along the way.)
Let’s start with the obvious: The 2009 economy. Intrade puts the probability of a recession in 2009 at 84 percent. Since it has been announced that we are in a recession and that it began in December 2007, why not 100 percent?
The contract traded on Intrade defines a recession using the rule-of-thumb “two consecutive quarters of negative real GDP growth.” Believe it or not, that may not occur.
The fourth quarter of 2008 and the first quarter of 2009 will both register negative GDP growth. Even though the economy will be sluggish at best in 2009, we actually may not experience six consecutive months of negative growth. Here’s hoping those shorting the contract are correct.
Traders put a 50-50 chance on an unemployment rate greater than 8 percent in December. That rate would be the highest since the 1982 recession. But traders also put only a 15 percent probability on the rate pushing past 9 percent.
Since we are starting the year with the unemployment close to 7 percent, getting to 8 won’t take long. I think it has a much higher probability of exceeding 9 percent sometime during the year, but it will not remain there long.
Intrade has no market for inflation so here is my guess. Inflation will be subdued over 2009. Gas prices have fallen and will not impart pressures on the index. With falling gas prices, there should be decreased pressure on transportation costs. Expect the rate of inflation to remain in the 2 to 3 percent range. (Inflation beyond 2009 is a more problematic forecast, however.)
What about Washington’s involvement with the economy? Specifically, what does the market think President-elect Obama’s impact will be on the economy?
One contract asks whether Mr. Obama (and one assumes his policies) will push real GDP growth greater than 2.5 percent over the next few years. Trading gives that outcome only a 16 percent. Traders attach a lower probability (14 percent) that his policies will be responsible for lowering the unemployment rate below 5 percent by 2011.
Markets often discount the ability of whoever is in charge to make a significant change in economic growth. Despite its recent demonization, market forces are largely responsible for economic growth and job creation.
This year will be much better than what we’ve experienced in the last half of 2008. Financial markets are showing signs of thawing. Real estate prices will stabilize as buyers no longer can resist mortgage rates at or below 5 percent.
The traders on Intrade also put very low probabilities on Chrysler or Ford going bankrupt. GM is another story. And oh, stock market indices will rise with the Dow rising to a shade below 10,000.
Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.