New York Fed's Model Predicts End of Recession in 2009

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

On Monday, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through February 2009 and its recession probability forecast through February 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (currently at 2.57%) to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of less than 1% on average through the next 12 months, below 1% by the end of the year, and only 0.57% by February 2010. The Treasury spread has been above 2% for the last 12 months, a pattern consistent with the economic recoveries after the 1990-1991 and 2001 recessions.

Bottom Line: The New York Fed's Treasury spread model predicts the end of the recession in 2009.

Comments

[mrbill:]

If people take this seriously, get ready for another sell off.

Mar 05 03:34 AM

[Steven Hansen:]

none of the modern day recessions were accompanied by the financial instability which came with this great recession. the data would have had more validity to me had it gone back to the early 1900's.

however, it is not a stretch to think the recession will end by the end of 2009 - it is a stretch to think there will be a normal recovery.

Mar 05 04:01 AM

[ciel:]

Wow... Just... wow.


Let's actually take a look at this a bit, shall we?

***"The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, ********and has been declining since then to ******less than 10% for December 2008 and January 2009***********

This only shows how useless a predictor this tool is for this kind of downturn.

****Looking forward through 2009, the Fed's model shows a****** recession probability of less than 1% on average through the next 12 months,********

HAAAAAHAHAHAHAHAHAHAA!... OMG LOL GOOD ONE!!!

Mar 05 04:50 AM

[Dave Wrixon:]

Probabaly time to get a new model or at least admit this isn't the one they really use.

Mar 05 07:47 AM

[Gaucho:]

This is the same model, albeit with slight modifications, that was used by Wall Street to determine the values and risks associated with CMOs and CDOs. Ya see everything worked out fine there. So stop worrying and keep putting money in the market and go out and buy the latest and most expensive electronic gadget

Mar 05 10:49 AM

[billddrummer:]

Now I'm really afraid we're being driven off a cliff.

Mar 05 01:30 PM

[@TexasER:]

The same models they used when the recession began in Dec 2007 that said we would avoid recession altogether? Need to get me one of those.

Mar 05 02:29 PM

[huskerbob:]

They need a model which accounts for massive amounts of government intervention which prevents the market from separating the winners from the losers. Instead of liquidation, we get zombies like AIG and GM hanging around indefinitely, sucking up resources and competing with better managed companies.
Can't think of a better way to prolong this downturn.

Mar 05 02:54 PM

[Truefire:]

The FED says what? & predicts what? Now I know that goldilocks almost fell for the "ole wolf in grandmas clothes" routine but you've gotta be baggin me (as in tea bagging).

The F-in Fed who blew up all the asset bubbles with easy money and is now about to destroy the US dollar should be our "guiding light", PUUUUUUHLEEEEASE!

You believe that and I have some citi group shares to sell you.

See you on the other side of the Revolution.

Mar 05 02:55 PM

[Mr. Ed, Jr.:]

OK, recession is all over, folks. Let's break it up, now. C,mon...nothing to see here. It's all over. Move along, now. Break it up. Let's go. Move along.

Mar 05 03:08 PM

[mktcycler:]

This time IS different. The Fed is pushing on a string with its current efforts to lower the Fed Funds rate because banks aren't lending. Nor are the bond markets functioning properly. (To the contrary, liquidity crises abound as debt covenants are being triggered left and right, compounded by weak earnings, FAS 157 write-downs, goodwill impairments and the like.) bottom line: monetary stimulus (which is the sort of stimulus implicit in the logic behind the "NY Fed's favorite Indicator") isn't going to get us out of this downturn. And, sadly, the Obama plan for fiscal stimulus is a pile of pork, compounded by the fact that, pork or no, most of the spending is not scheduled to be spent until 2010 or later.

Mar 05 05:27 PM

[Thomas Wagner:]

The model relies on the theory that a positive sloped yield curve, one where long term rates are higher than short term is predicting or imputing an inflation rate. I think one must adjust the model to a relative one that takes in to account the relative rise and or fall at various points on the yield curve in relation to one another. Plotting the relative change of short term vs long term rates over time would probably yield a different prediction. This time around short term rates plunged as investors across the yield curve ran for the cover of short term liquid T-bills. Overall the entire yield curve moved down with the exception of 20 Yr plus rates. I think the next shoe to drop will be in the long term agency market as this is heavily populated by foreign investors. In short this time the model is being driven by extream deflationary forces that have not been fully considered.

Mar 05 08:28 PM

[Moon Kil Woong:]

Dream on, they have been constantly hopelessly behind this cycle. Also they are supporting their old guard Geithner with rosy predictions to blow up our private parts with no empirical data beyond what high school chartist hacks could provide.

I'd be more hopeful if they predicted the recession would go on for 5 more years since I would tend to believe whatever they saw will be 100% wrong.

Mar 05 10:44 PM

[scotty1560:]

The Great Real Estate Bubble of the 1920's

by Polly Cleveland

Economists conventionally attribute the Great Depression to blunders by the then-new Federal Reserve Bank. According to this story, promoted by Milton Friedman and the Chicago School, after the stock market crash of 1929, the Fed kept interest rates too high, strangling the economy. This story made most economists confident that it couldn't happen again.

But there's a different story: the story of the giant 1920's real estate bubble. It began with cars.

Starting in 1899, the auto industry took off exponentially, dipped for two years during World War I, then took off exponentially again during the 1920's. Production reached a peak of over 4 million vehicles in 1929, before collapsing. It did not again pass 4 million until 1949!

The auto suddenly opened up vast suburban and rural areas to housing. Developers--legitimate and bogus--leapt at the opportunity. Banks jumped in too, creating so-called "shoestring mortgages"--effectivel... allowing property purchases on margin. Within a few years, tens of thousands of acres around major cities had been subdivided and sold. In rural areas, developers bought up farms, dug a pond, built a "club house" and sold cheap "vacation" lots. As reported in Homer Hoyt's classic One Hundred Years of Land Values in Chicago, from 1918 to 1926 Chicago population increased 35% and land values rose 150%, or about 12% a year.

In 1926, land values stagnated, then fell. By 1933, Chicago land values had fallen some 70% overall; peripheral areas fell even more dramatically. After 1929, home construction collapsed, and--paralleling the auto industry--did not again pass the 1926 level until 1950. Around Detroit, over 95% of recorded lots were vacant as of 1938. Nationally, there were an estimated 20 to 30 million vacant lots, compared to about 30 million occupied housing units. According to economic historian Alex Field, the barren subdivisions ringing the cities hindered the recovery of construction: Missing titles of defaulted owners and poor physical layout created de facto brownfields.

The real estate bubble helped set off and then worsen the Depression. Collapsing land values left people suddenly much poorer, so they cut spending. They also defaulted on mortgages, sticking the banks with "toxic" assets: liens on near-worthless property. The struggling banks in turn cut off lending even to good customers. Bank runs--panicky depositors withdrawing cash--further crippled the banking system. Between drops in spending and lending, businesses failed, unemployment soared, and prices fell.

Thus a radical innovation of the early 1900's--the automobile--set off a destructive real estate bubble in the 1920's. Another radical innovation took hold in the late 1990's: "securitization", that is, the aggregation of consumer debts, especially mortgages, into marketable packages known as "collateralized debt obligations" or "CDO's." CDO's set off another giant real estate bubble by making houses "affordable" to poorer Americans. The collapse of the CDO bubble stuck banks once again with "toxic" real estate.

Fortunately, economists--and markets-- now recognize that to limit damage, we must force banks to write down the garbage quickly. But write-downs will reveal that some big banks' liabilities exceed their assets, requiring drastic remedies, including restructuring, breakup, and possibly temporary nationalization. Unfortunately, so far our new Treasury Secretary, Tim Geithner, either lacks the nerve or the authorization. Unless he acts soon, we face another "lost decade" like the 1930's.

Mar 06 12:50 AM

[bbzz24:]

i feel pacified. want to buy my C stock at $50?

Mar 06 02:39 AM