According to the Cyclical Vector Auto Regression model¹, the likelihood based on data through Q2 2011 indicates about a 1 in 3 probability of recession through the end of 2012. The trends during the third quarter have been very mixed – a strong July followed by a very tenuous August. Much will depend on how the consumer reacts to weakness in equities and jobs. Europe remains the biggest wild card. If leaders there can generate some confidence very soon that the euro-zone won’t come undone, then a boost to confidence would likely be enough to eliminate significant headwinds. If the Europeans don’t have near-term successes, then a recession is much more likely even if they ultimately come through and keep the EU and euro intact. The doggedly ugly slow process in Europe is clearly chipping away confidence that is badly needed right now to keep the economic recovery going. Hence, recession risks are probably continuing to rise above 1 in 3. Waffling in Washington is also contributing to the continual sapping of business and consumer confidence.

Despite this grim scenario, a technical recession, should it occur, would likely be relatively mild. Corrective mechanisms have largely run their course throughout the private sector in the last 2 years. As long as the source of the next recession is a lack of confidence, then the economy should come back relatively quickly. However, another recession would likely worsen the fiscal situations at the state, federal and local levels. Political leaders would likely react to those stresses with higher spending, deficits and ultimately taxes. Hence, the long-term outlook would likely become worse.

About Author: George Mokrzan is the Director of Economics and a Vice President at Huntington. For 15 years, George Mokrzan has provided economic analysis and forecasting for Huntington Bancshares Incorporated, a regional bank headquartered in Columbus, Ohio since 1866. Mokrzan performs macroeconomic analyses of the U.S. and world economies in support of Huntington’s investment management business. He developed the Cyclical Vector Auto-Regression (V.A.R.) model to forecast major turning points in the economy, and relative industry and sector stock price probabilities. Most recently, Mokrzan was appointed as the Vice Chairman of the ABA Economic Advisory Committee 2011. Mokrzan has served on the Economic Advisory Council (EAC) of the American Bankers’ Association (ABA) since 2005. He is one of a small group of economists chosen from geographically diverse areas of the United States to provide guidance on banking and economic issues for the ABA. He also is a panelist for the Federal Reserve Bank of Philadelphia Livingston Survey and serves on the CNN Money Economist Poll.

The views expressed in this reprint are those of the author as of September 6, 2011, and are not intended as a forecast or as investment recommendations. Information provided is as of the dates described in the article and are subject to change at any time.

¹ Vector Auto Regression (“VAR”) model is a proprietary tool developed by Dr. Mokrzan, which estimates the probability that a given industry stock price index will outperform the S&P 500 index.