NY Fed Model: No Chance of Recession in 2010

A few days ago, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through July 2009, and the Fed's recession probability forecast through July 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.38% spread in June, the second highest since May 2004) to calculate the probability of a recession in the United States twelve months ahead.

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 in almost every month (see chart above and chart below). For July 2009, the recession probability is only 0.97% and by July 2010 the recession probability is only .09%, the second lowest level since May 2005.

Further, the Treasury spread has been above 2% for the last 17 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above). The pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession (see chart below).

Comments

[whidbey:]

Very persuasive until you recall that the spread did little to warm of the last recession, it is at best a concurrent indicator that argues it knows a lot about now, not the future.

But the real point is, that the last recovery was "jobless" and without wage appreciation which set the stage for the Fed policy. This one looks to be headed for that distinction as well, and we should recall that stagflation can not be ruled out with this indicator. In fact, we can not rule another bubble based on stimulus money sloshing in the streets.

Not really heartening.

Aug 06 05:02 PM

[PainfullyAware:]

Cetin - Did You Hire An Army Or Do You Have Nothing Better To Do?

Impressive amount of new "User Names" every day.


On Aug 06 07:36 PM day fade wrote:

> hat tip to www.iamned.com

Aug 06 08:48 PM

[PainfullyAware:]

I would not put much faith in the "Predictive Powers" of the Fed; They Would Not Even Use The Word "Recession" Until about 8 or 9 months into it.

It seems to be that "As long as we do not include the populous in our metrics - The Jobless Recovery Is At Hand".

Very Marie Antoinette In My Opinion.

Aug 06 08:52 PM

[BigJake:]

Cetin is most likely living in his mom's basement with the an ethernet cable embedded into his arm like an IV. He definitely has nothing better to do.


On Aug 06 08:48 PM PainfullyAware wrote:

> Cetin - Did You Hire An Army Or Do You Have Nothing Better To Do?
>
>
> Impressive amount of new "User Names" every day.

Aug 06 09:34 PM

[Moon Kil Woong:]

So the Fed predicts the probability of a recession off the US Treasury note rates that it issues and can manipulate (although less now that no one really wants long term treasuries anymore). No wonder they are constantly absolutely clueless. Talk about self deception.

Aug 06 10:08 PM

[ciel:]

Let me see if I do understand this magical "Probability of Recession" meme you and other several others keep trumpeting about --

Prior to the start of the worst recession since the Great Depression this tool, and I think I do use that word appropriately, gave a warning of an at-worst 40% chance of impending recession... and that series high was hit even as the Great Recession had actually already begun. Twelve-months prior to Dec. 07 (it's supposed predictive powers) it had been flagging a whopping 20-25% chance of recession 12 months out.

For shits & giggles, I wonder how well it did predicting the odds of recession for Q2 of this year (GDP just came in with an annualized rate of "growth" of -1% for that quarter) --- Ah, yes, the Fed Magic Ted Spread Probability Wondermeter gave us about an 18% chance of being in recession.

Stunning.

Aug 07 01:31 AM

[Jimbo:]

The FED may be smoking the good stuff again.

Aug 07 01:03 PM

[H. T. Love:]

Don't forget that the 1% is likely wrong (or a falsehood). Just as the previous quarter was revised downward, this one will probably suffer the same fate.

HardToLove

On Aug 07 01:31 AM ciel wrote:

> Let me see if I do understand this magical "Probability of Recession"
> meme you and other several others keep trumpeting about --
>
> Prior to the start of the worst recession since the Great Depression
> this tool, and I think I do use that word appropriately, gave a warning
> of an at-worst 40% chance of impending recession... and that series
> high was hit even as the Great Recession had actually already begun.
> Twelve-months prior to Dec. 07 (it's supposed predictive powers)
> it had been flagging a whopping 20-25% chance of recession 12 months
> out.
>
> For shits & giggles, I wonder how well it did predicting the
> odds of recession for Q2 of this year (GDP just came in with an annualized
> rate of "growth" of -1% for that quarter) --- Ah, yes, the Fed Magic
> Ted Spread Probability Wondermeter gave us about an 18% chance of
> being in recession.
>
> Stunning.

Aug 08 02:23 PM

[housam Jarrar:]

I definitely agree with most people posting here that the predictive powers is definitely questionable at best and flat out wrong at worst.One more thing which no one has mentioned so far is the fact that even if this tool was proven to be accurate in its predictive powers,no one seems to mention the fact that the feds have been buying treasuries to artificially lower rates in hopes of allowing for a recovery(I doubt) and how such actions can and will skewer any validity to a tool that uses treasury spreads as an indicator.

Aug 09 04:41 PM