WSJ Economic Forecast participants report the probability of a recession within the next 12 months. The consensus of the June survey participants has that probability at 16 percent. It appears that Q3 GDP growth appears to play a critical role in forecasters recession probabilities. The table below reports the results of a simple regression. A forecaster who predict zero GDP growth in Q3 would place, on average, a 40 percent probability on the chance of a recession in the next 12 months. For every one percent increase in predicted Q3 GDP growth, that average recession probability would decrease by 10 percentage points. The other quarters do not appear to have a statistical relationship with recession probabilities.
Taken altogether, while a recession does not appear likely to these forecasters, the third quarter plays a pivotal role in these forecasts. The current consensus is 2.6% growth in the third quarter, only slightly below Q2 expectations. If we see weakness leading into the third quarter, we can expect forecasters to start increasing the probability of a recession.
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