“Animal spirits” or confidence levels continue to improve as Americans adapt to higher levels of unemployment and fear fades. A plausible forecast for unemployment suggests that confidence will rise to about zero in about 2012, suggesting the next presidential election will be bitterly fought.
The probability of an NBER-type downturn in the next year is about zero. The conditions for a collapse of confidence will not exist unless unemployment spikes higher than it already is above adaptation level, as it did in late 1981 and 1982. Nor is the yield curve is suggesting a collapse is in the cards near-term.
The labor market continues to look very sick. The trend in the labor market suggests that the next recession, when it does arrive in about 2013 or 2014, will be worse than this past one in terms of unemployment.
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