by Calculated Risk on 5/06/2007 08:00:00 PM

Crux: an essential point resolving an outcome.(m-w online 2)
The predominant view on Wall Street is that the current economic sluggishness is a mid-cycle slowdown, and that slow growth would bottom in Q1 2007, and then improve over the remainder of the year.

Click on graph for larger image.

This graph shows the YoY change in GDP and employment since the early '60s. Most forecasters believe the current period is similar to the mid-cycle slowdowns in the '80s and '90s.

Other less common views include: a weaker economy going forward, with a possible recession; and the view that a hard landing is almost unavoidable. My view is that the economy will be weaker, with the probability of a recession in 2007 about a coin-flip.

Although the last two views still have time, the next couple of quarters are critical for the consensus view. Further weakness in Q2, and the consensus view on the economy will have been too optimistic. For these forecasters, the economy is at the crux.