NY Fed Model: Chance of Recession Near Zero

by: Mark J. Perry

The New York Federal Reserve updated its "Probability of U.S. Recession Predicted by Treasury Spread" this week with treasury yield data through July 2011, and the Fed's recession probability forecast through July 2012 (see chart above). The NY Fed's Treasury model uses the spread between the yields on 10-year Treasury notes (3.00% in July) and 3-month Treasury bills (0.04%) to calculate the probability of a U.S. recession up to twelve months ahead (see details here) using the spread between those two yields (2.96% in July).

The Fed's model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40% (see chart above), and has been declining since then in almost every month. For July of this year, the Fed's recession probability was less than 1% (0.97%) and for July of next year the recession probability is even lower, at only 0.80% (8/10 of 1%). According to the NY Fed Treasury Spread model, the chances of a double-dip recession through the summer of next year are essentially zero (a 1-in-125 chance for July 2011).