Last April I described new research on the role of oil prices in the recent recession. Here's an update on what's happened since then.

In a paper presented at the Brookings Institution last spring, I examined the post-sample forecasting performance of an equation originally published in 2003, which relates real GDP to past values of GDP and oil prices. I noted in April that if you had known in October 2007 the values of GDP through 2007:Q3 and what was about to happen to oil prices through 2008:Q2, you could have used that historical relation to predict the value of U.S. real GDP for 2008:Q3 with an accuracy better than 99.5%.

Solid line: 100 times the natural log of real GDP. Dotted line: dynamic forecast (1- to 9-quarters ahead) based on coefficients of univariate AR(4) estimated 1949:Q2 to 2001:Q3 and applied to ...

This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find of interest.

• Dan Holland (RealClearMarkets): An interview with Doug Kass, September 21, 2009. Hedge fund manager Doug Kass has been called many different names over the course of his storied and successful, nearly forty-year investing career. Names like the “Bear of Boca”; “The Peerless Prognosticator of Palm Beach”; as well as the “Anti-Cramer.” He’s earned them all. As a noted short seller unafraid to swim against the tide of consensus, he seems to relish his self-appointed role bucking Wall Street groupthink and profiting handsomely from betting against the crowd.

• Intelligent Investing Transcript (Forbes): Jean-Marie Eveillard, September 14, 2009. An interview by Steve Forbes of Jean-Marie Eveillard, is senior adviser of First Eagle Funds.

• Peter Boone and Simon

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Encouraging economic data and Federal Reserve Chairman Ben Bernanke’s view that the recession was “very likely over" sent stocks higher for a second straight day.  A better-than-expected rise in retail sales, helped in part by the government’s cash-for-clunkers program and higher gasoline prices, eased concerns that consumers were spending with restraint. 

Speaking at a Brookings Institution conference, Bernanke, however, added a note of caution, saying, “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time."

This morning’s stock futures indicate Wall Street would open with gains, helped by increased M&A activity, optimistic guidance from companies, and words from Warren Buffett that Berkshire Hathaway (NYSE:BRK.A) is "buying stocks right as we speak."

Yesterday, the 30-stock Dow Jones industrial average gained 57 points, or 0.6%, to 9,683.41, its highest point since October 6. 

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Gasoline prices (in case you've been hiding in a cave and didn't know) have been on something of a roller coaster the last few years. And it looks as though we're climbing back up another hill at the moment. How much are the recent increases in gas prices likely to weigh down American consumers?

U.S. average retail gasoline price, in dollars per gallon, plotted monthly using the data from the middle week of the month, January 2004 to June 2009. Data source: EIA.

Up until the fall of 2008, consumer sentiment had been closely following that roller coaster, with a sharp plunge in consumer sentiment accompanying the spiking gas prices associated with Hurricane Katrina in 2005, a second, broader drop in sentiment accompanying the second, broader bump in gasoline prices in 2006, and then a significant sustained decline in consumer

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Barring some dramatic – and unforeseen – news this week, expect investors to tread water until Thursday, when the government is expected to release the results of the bank stress tests it conducted on the 19 largest U.S. banks.

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

“I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,” Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S.

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Here I provide some more background on the relation between oil price increases and economic recessions.

When I first began working on my Ph.D. dissertation in 1980, I was intrigued by the fact that the oil embargo of 1973-74 and the collapse in Iranian oil production after the revolution in 1978 were both followed by global recessions. But when I called attention to the fact there had been a sharp increase in the price of oil prior to 6 of the 7 postwar U.S. recessions up to that point, the general response was one of skepticism.

By the time I was presenting evidence of this relation at various seminars in 1981-82, the Iran-Iraq War had produced yet another shock to world oil markets and the NBER declared that the U.S. experienced a new recession immediately on the heels of the previous downturn, meaning that the evidence had now become that

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In a follow-up on my earlier post, I'd now like to discuss the second part of my paper, Causes and Consequences of the Oil Shock of 2007-08, which I presented today at a conference at the Brookings Institution. Here I'll review the role that the oil price shock may have played in causing the economic recession that began in 2007:Q4.

My paper uses a number of different models that had been fit to earlier historical episodes to see what they imply about the contribution that the oil shock of 2007-08 might have made to real GDP growth over the last year. The approaches surveyed include Edelstein and Kilian (2007), who examined the detailed response of various components of consumer spending, Blanchard and Gali (2007), who studied the extent to which the contribution of oil shocks has significantly decreased over time, my 2003 paper, which

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I will be presenting my latest research paper, Causes and Consequences of the Oil Shock of 2007-08, at a conference today at the Brookings Institution. Here I review some results from that paper about what caused oil prices to rise so spectacularly in 2007-08 only to decline even more dramatically afterward.

World real GDP increased by 9.4% between 2003 and 2005. That growth in world income was the primary cause behind an increase in world petroleum consumption of 5 million barrels per day between 2003 and 2005, a 6% increase over the two years. The next two years (2006 and 2007) saw even faster economic growth (10.1% cumulative two-year growth), with Chinese oil consumption alone increasing 870,000 barrels per day. Yet between 2005 and 2007, global oil production stagnated.

Thin line. Monthly global crude oil production, including lease condensate, natural gas plant ...

China blasted U.S. economic policy yesterday (Thursday) at the Strategic Economic Dialogue, a two-day summit engineered to address long-term issues between the two countries. Chinese authorities have grown more fervent, and more explicit, with their criticism of the U.S. financial system over the past year, evidence of a shift in the balance of power between the nations.

“Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” said Zhou Xiaochuan, governor of the Chinese central bank. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has

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With the national conventions behind us, and a series of debates now on the horizon, today I want to give you a little preview of what each of the two major party's candidates might do to our tax bills in 2009. Before we go any further, I want to make something absolutely clear: I'm not endorsing either candidate's platform. I don't think they go nearly far enough in terms of true reform. Besides, as guys like Ron Paul have been pointing out, the real problem is that our government is simply spending too much money in the first place! But that's a rant for another day. Today, I just want to give you a straightforward look at what kind of possible changes are on the horizon, and then tell you about some more ...