According to Treasury Spread Model, No Chance of a Douple-Dip Recession

Full history here, click to enlarge.

The New York Fed just released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through September 2009, and the Fed's recession probability forecast through September 2010 (see charts above). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.28% spread in September) to calculate the probability of a recession in the United States twelve months ahead.

The Fed's model (data here) shows 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. For September 2009, the recession probability is only 0.66% (2/3 of 1%) and by a year from now in September 2010 the recession probability is only .11%, or about 1/10 of one percent.

Further, the Treasury spread has been above 3% for the last five months (since May), a pattern consistent with the economic recoveries following the last two recessions. Finally, 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.

According to the NY Fed model, the chances of a double-dip recession this year or next year? Zero.

Comments

[Tom Armistead:]

Yay!

Oct 15 07:27 PM

[Donald Ingram:]

This is from the same source that did not see anything wrong with the economy leading up to the deepest recession since the second world war! And then proceeded to do everything wrong in a vain attempt at "fixing" the economy! After which it prognosticates that the recession is over and that chances of any secondary dip for the next two years is zero!!!!!!!
GIVE ME A BREAK! I may have been born at night. But not last night!

Oct 15 07:32 PM

[Ponchovilla:]

Fantastic chart with great predictive powers.

If only the NY Fed could come up with 5 or 6 more of these with equivalent economic predictive power, the government could hire a monkey and place him at a keyboard. Of course his working conditions would be supervised by animal activists. Additionally he would not be allowed to join a union and demand too many bananas in compensation. Just think how many government economists would be furloughed and we would create a new chart to show the impact of this type of efficiency to reduce the federal budget. Maybe furloughed is too harsh. Just pay at minimum wage. The only problem I see is getting health care coverage for the monkey.

Oct 15 07:45 PM

[Jasper M:]

I think the title is a bit backwards -
'Double Dip recession accords Zero chance for Treasury'

(Though in fairness, doesn't seem to me that we are credibly out of the first dip yet.)

Oct 15 08:45 PM

[Can'tSpotAB...:]

More pollyanna from Prof Perry....

No credit crunch: seekingalpha.com/artic...

US Economy doing quite well: seekingalpha.com/artic...

We're still a long way from a banking crisis: seekingalpha.com/artic...

A little perspective, according to the world of Dr. Mark Perry:

First, there's no recession:
mjperry.blogspot.com/2...

Second, the monetary base was growing at an acceptable rate:
mjperry.blogspot.com/2...

Third, the big one, there is no credit crisis:
mjperry.blogspot.com/2...

mjperry.blogspot.com/2...

mjperry.blogspot.com/2...

Especially because, "banks are lending at record levels":
mjperry.blogspot.com/2...

Remember, this is an *economist* saying this. And yet I highly doubt that any respected economist would buy this, nor is the market (A2/P2 less AA spread, TED spread both blown out to ridiculous levels).
www.federalreserve.gov...

Oct 15 10:08 PM

[DRich:]

I'd be willing to think that this is more than a CYA data point if it extended out to "guess" the future and the next occurrence. Using lagging data to predict the past is just useless blather.

Oct 15 10:58 PM

[The Inflect...:]

Thanks for the article. Under normal circumstances this theory would have a lot of weight in my opinion. However, this data is skewed because the Fed has been monetizing the debt. In other words they have been buying Treasuries keeping yields on the long end lower than they other wise would be. Therefor this spread is is off to the low side and is throwing off your thesis.

Thanks for the chart though as this will be useful when we get back to normal times whenever that may be.

Tom Henderson, Strategist JBH Capital.

Oct 15 11:57 PM

[Gary A:]

This is not the last two recessions. The consumer is broke. He wasn't broke before. When are you people going to wake up.

80 percent of household purchases are by women. Women with families are getting killed by the Fed policies. They can't afford the gas, milk, food, or anything else that Goldman Suchs has managed to pump to infinity.

They say they aren't going to spend like they used to. Did that happen in the last two recessions?

What a naive bunch we have who listen to government figures.

Oct 16 12:13 AM

[jeremiah74:]

honestly Sir, if you are an economics professor I would expect some more wisdom from you

the Fed is engaged in QE and has lowered rates to record lows, SPECIFICALLY to counter the effect of rates, on the short AND long end of the curve, on the economy. they make sure rates stay low even in the 30yr segment to make mortgages and corporate funding cheaper . so the whole curve has become a policy tool. this was not the case in the past, so the yield curve's predictive power in this case is gone..

seriously, you teach people economics ???

your comments however are highly entertaining in general. remind me of Baghdad Bob in the Iraqi war,who said they are winning while the marines were already within eyesight to where he gave the press conference..

Oct 16 04:00 AM

[WOT:]

If laughter is indeed the best medicine, I must say thank you Dr. Perry for writing out this particular perscription.

Oct 16 04:11 PM