With my hectic travel schedule, I am a Weather Channel fan because it allows me to avoid some weather challenges, particularly with airlines. One of my favorite series is “It Could Happen Tomorrow,” – a worst-case scenario when weather events combine to create disaster.
If one turns to the economy, it appears the disaster is happening today. For many of you who follow this column or have listened to me speak, I have discussed the probabilities of a code green, code yellow and code red in the economy, with code red being the potential disaster.
Code green: In today’s economic forecast, the best that can be expected is a “recession lite,” which at this time has a 30% probability of occurring. To stabilize the economy, oil prices would have to decline to below $75/barrel, housing starts by next spring would increase to 1.2-1.5 million and jobless rates and unemployment rate must stabilize.
Code yellow: The probability of a type of recession like in 1973-1974 and 1980-1981 is 40-50%. Signs of this type of downturn would include housing starts below 1 million, an unemployment rate of 7-9% and a global recession. The economic cards point in this direction.
Code red: This scenario is the category five economic hurricane or the F-5 economic tornado. Here are the scenarios to watch play out over the next six months:
- First, there must be a major global economic recession.
- The U.S. stock market would decline to 6,000-6,500 and other markets would follow suit worldwide.
- Confidence in the Euro would fall and the dollar would appreciate to par or exceed the Euro.
- Oil would stay near $100/barrel or above.
- Housing starts would decline to 750,000.
- Unemployment rate would exceed 10%.
- High nominal and real interest rates would persist.
- A black swan or unexplained event would take place.
What is the probability of a code red scenario? Well, it is much higher than six months ago when I indicated it would be 10%. You do the math based upon the other scenarios. This would be the 9-11 and Katrina of the economy in the U.S. and worldwide. Let’s hope it’s not happening today.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].