Economist and Columbia Business School Dean Glenn Hubbard was making the rounds of summer executive education classes this morning, giving his spiel on the state of the economy. I happened to be sitting in with a class full of Chinese CEOs. Here are the three scenarios for the immediate future that Hubbard laid out for them:
1) The good scenario. Credit market troubles remain mostly contained, energy prices drop a little, U.S. economic growth is in the 2.5% to 3% range. Odds: 60%.
2) The bad scenario. Credit problems get worse, risk spreads (the difference in rates between Treasury bonds and riskier debt like junk bonds) widen and stay big, and energy prices fail to drop. With that, economic growth would slow substantially. Odds: 25%.
3) The ugly scenario. Credit markets freeze up, oil prices stay high, and the economy falls into recession. Odds: 15%.
I wouldn’t put too much weight on the specific percentages. It’s all guesswork, after all. But Hubbard is a congenitally optimistic guy, and he admitted without prompting that, as the first chairman of President Bush’s Council of Economic Advisers, he failed to see the 2001 recession coming. If he now sees a 40% chance of worse economic times ahead, I’d say it’s a good idea to have a contingency plan ready.