Recession Probability Models

By Ted Kavadas
June 4, 2013

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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 blog post concerning this measure on March 1, 2010, titled "The Yield Curve as a Leading Indicator."

Currently (last updated June 3, using data through May) this "Yield Curve" model shows a 4.19% probability of a recession in the United States twelve months ahead. For comparison purposes, it showed a 5.38% probability through April.

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.

This model, last updated on June 3, 2013, currently shows a .64% probability using data through March.

Here is the FRED chart (last updated June 3):

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Marcelle Chauvet and Jeremy Piger; U.S. Recession Probabilities [RECPROUSM156N]; accessed June 4, 2013:

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

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The two models featured above can be compared against measures seen in recent blog posts. For instance, as seen in the May 13 post titled "The May 2013 Wall Street Journal Economic Forecast Survey" economists surveyed averaged a 15% probability of a U.S. recession within the next 12 months.

Of course, there is a (very) limited number of prominent parties, such as ECRI (most recently featured in the May 31 post titled "Long-Term Charts Of The ECRI WLI & ECRI WLI,Gr. May 31, 2013 Update") that believe the U.S. is currently experiencing a recession.


This Special Note summarizes my overall thoughts about our economic situation.



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