Recession Probability Models - September
2016
September 7, 2016
by Ted Kavadas
of RevSD
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 a post
concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”
Currently (last updated September 6, 2016 using data through August) this “Yield Curve” model shows
a 9.2073% probability of a recession in the United States twelve months ahead. For comparison
purposes, it showed a 9.8505% probability through July, and a chart going back to 1960 is seen at the
“Probability Of U.S. Recession Predicted by Treasury Spread.”
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.
(http://faculty.ucr.edu/~chauvet/ier.pdf)
Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.
Page 1, ©2017 Advisor Perspectives, Inc. All rights reserved.
This model, last updated on September 1, 2016, currently shows a .38% probability using data through
June.
Here is the FRED chart (last updated September 1, 2016):
Data Source: Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities
[RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed September
6, 2016:
http://research.stlouisfed.org/fred2/series/RECPROUSM156N
The two models featured above can be compared against measures seen in recent blog posts. For
instance, as seen in the August 11 post titled “The August 2016 Wall Street Journal Economic
Forecast Survey“ economists surveyed averaged a 20.95% probability of a U.S. recession within the
next 12 months.
SPX at 2186.48 as this post is written
Page 2, ©2017 Advisor Perspectives, Inc. All rights reserved.
© RevSD
Page 3, ©2017 Advisor Perspectives, Inc. All rights reserved.