The Probability Of A U.S. Recession - May 2016

May 04, 2016 11:42 AM ETDIA, IWM, QQQ, SPY1 Comment
Ted Kavadas profile picture
Ted Kavadas
974 Followers

Summary

  • Identifies and discusses two recession probability models.
  • Shows the current readings and historical readings of these models.
  • Compares the models' probabilities to the average estimate from a recent survey of economists.

Note: The previous monthly update can be seen in the April 6 article titled "Recession Probability Models - April 2016."

There are a variety of economic models that are supposed to predict the probabilities of recession. While I don't agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these -- as well as other recession models -- can fluctuate significantly.

The first is the "Yield Curve as a Leading Indicator" from the New York Federal Reserve. I wrote an article concerning this measure on March 1, 2010, titled "The Yield Curve as a Leading Indicator."

Currently (last updated May 3, 2016 using data through April) this "yield curve" model shows a 6.28% probability of a recession in the U.S. 12 months ahead. For comparison purposes, it showed a 6.14% probability through March, and a chart going back to 1960 is seen at the "Probability Of U.S. Recession Predicted by Treasury Spread" (PDF).

The second model is from Marcelle Chauvet and Jeremy Piger. This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., 'An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,' International Economic Review, 1998, 39, 969-996. Faculty.ucr.edu (PDF)

Additional details and explanations can be seen on the "U.S. Recession Probabilities" page. This model, last updated on May 2, 2016, currently shows a 1.78% probability

This article was written by

Ted Kavadas profile picture
974 Followers
I believe that our economic situation is vastly misunderstood. The future adverse consequences of this misunderstanding can not be understated. It is for this reason that I write about our economic condition, with a focus toward (economic) Sustainable Prosperity and the future economic condition of the United States. As for my background: I have investment experience dating back to 1988. This includes advanced knowledge and experience in equities, options, futures, futures options, forex, and economic research. Much of what is written in this site is a corollary to the analytical and modeling work I do, and have done, concerning the financial markets. I also have corporate experience. This includes Finance, Pricing, Strategy, Business Analysis and Business Planning; and various aspects of Marketing Management. My education includes an MBA from University of Chicago and an Undergraduate Degree (B.S.) in Business from Indiana University. Prior publishing credits include Barron’s, Director’s Monthly, and a contributor to the book “The Art of M&A Integration.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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