Prevalence Recession Predictions Econbrowser

Yesterday’s Bloomberg article “Fed Staff Sees 50-50 Recession Possible” prompted me to consider the implications of the latest readings for spreads. Figure 1 shows recession probabilities estimated using a simple probability model based on the 10-year-3-month and 10-year-2-year margins, up to November 23.

Figure 1: Expected Probability of Recession 10-year-3-month Range Spread (blue), 10-year-2-year Range Spread (tan), 10-year-3-month Range Spread Powered by FCI, Foreign Term Spread (green). All models are rated over the range 1986M01-2022M11. The National Bureau of Economic Research has peak-to-trough recession dates highlighted in grey. Red dashed line with a probability of 50%. Source: Author accounts, NBER.

While the 10yr-3mo and 10yr-2yr models don’t breach the 50% threshold, they are close enough to merit a 50-50 reading.

In the work of Ahmed and Shin (2022), the foreign range spread and the financial conditions index were shown to have additional predictive power for US recessions (see Table A1). I augmented the 10yr-3mo spread with the average spread between Germany and the Eurozone/UK/Japan 10yr-3mo, and the National Financial Conditions Index, to get the estimated probabilities of recession shown in the green line in Figure 1. The reading for November 2023 is 56%.

All these estimates are based on the following spreads:

Figure 2: US Treasury term spread 10yr-3m (blue), 10yr-2yr (tan), and G3 Germany/UK/Japan 10yr-3m (green), all %. The National Bureau of Economic Research has peak-to-trough recession dates highlighted in grey. Source: Treasury via FRED, OECD Key Economic Indicators, NBER and author accounts.

This entry was posted on by Minzy Chen.

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