Recession Probability Models – December 2022

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 December 4, 2022 using data through November 2022) this “Yield Curve” model shows a 38.0565% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 23.0673% probability through September 2022, 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. (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 December 1, 2022 currently shows a .90% probability using data through October 2022.

Here is the FRED chart (last updated December 1, 2022):

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed December 8, 2022:  
http://research.stlouisfed.org/fred2/series/RECPROUSM156N

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The two models featured above can be compared against measures seen in recent posts.  For instance, as seen in the October 16, 2022 post titled “The October 2022 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 63% probability of a U.S. recession within the next 12 months.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3965.71 as this post is written

Charts Indicating Economic Weakness – December 2022

Throughout this site there are many discussions of economic indicators.  This post is the latest in a series of posts indicating facets of U.S. economic weakness or a notably low growth rate.

The level and trend of economic growth is especially notable at this time. As seen in various estimates, the probability of recession has grown significantly.

As seen in the October 2022 Wall Street Journal Economic Forecast Survey the consensus (average estimate) among various economists is for .22% GDP in 2022, .44% GDP in 2023, 1.82% GDP in 2024, and 2.12% GDP in 2025.

Charts Indicating U.S. Economic Weakness

Below is a small sampling of charts that depict weak growth or contraction, and a brief comment for each:

The Yield Curve (T10Y2Y)

Many people believe that the Yield Curve is a leading economic indicator for the United States economy.

On March 1, 2010, I wrote a post on the issue, titled “The Yield Curve As A Leading Economic Indicator.”

While I continue to have the stated reservations regarding the “Yield Curve” as an indicator, I do believe that it should be monitored.

The U.S. Yield Curve (one proxy seen below) is negative and is (all things considered) notably very low when viewed from a long-term perspective. Below is the spread between the 10-Year Treasury Constant Maturity and the 2-Year Treasury Constant Maturity from June 1976 through the December 7, 2022 update, showing a value of -.84% [10-Year Treasury Yield (FRED DGS10) of 3.51% as of the December 7 update, 2-Year Treasury Yield (FRED DGS2) of 4.34% as of the December 7 update]:

source: Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed December 8, 2022: https://fred.stlouisfed.org/series/T10Y2Y

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Average Weekly Overtime Hours of Production and Nonsupervisory Employees: Manufacturing (AWOTMAN)

Various U.S. manufacturing measures continue to indicate growth. However, overtime hours for manufacturing is somewhat subdued by recent-era economic expansion standards and the measure on a Percent Change From Year Ago level has recently gone negative.

Shown below is the “Average Weekly Overtime Hours of Production and Nonsupervisory Employees: Manufacturing” measure (with last value of 3.8 hours through November) last updated December 2, 2022:

Below is this measure displayed on a “Percent Change From Year Ago” basis with value -7.3%:

source: U.S. Bureau of Labor Statistics, Average Weekly Overtime Hours of Production and Nonsupervisory Employees: Manufacturing [AWOTMAN], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed December 7, 2022: https://fred.stlouisfed.org/series/AWOTMAN

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Real Average Hourly Earnings

Various measures of (nominal) average hourly earnings continue to show significant growth. However, due to continuing high inflation, Real Average Hourly Earnings continues to decline. Shown below is a chart of earnings measures as seen in The Economics Daily of November 18, 2022 titled “Real average hourly earnings decreased 2.8 percent from October 2021 to October 2022”:

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Personal Savings Rate (PSAVERT)

The Personal Saving Rate has been very volatile since 2020, and has now declined to nearly the lowest levels seen in the entire data series.

As seen below, the Personal Savings Rate is now at 2.3% through October 2022, as of the December 1, 2022 update:

source: U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed December 7, 2022: https://fred.stlouisfed.org/series/PSAVERT

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Other Indicators

As mentioned previously, many other indicators discussed on this site indicate weak economic growth or economic contraction, if not outright (gravely) problematical economic conditions.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3953.35 as this post is written

Building Financial Danger – December 8, 2022 Update

My overall analysis indicates a continuing elevated and growing level of financial danger which contains many worldwide and U.S.-specific “stresses” of a very complex nature. I have written numerous posts on this site concerning both ongoing and recent “negative developments.”  These developments, as well as other exceedingly problematical conditions, have presented a highly perilous economic environment that endangers the overall financial system.

Also of ongoing immense importance is the existence of various immensely large asset bubbles, a subject of which I have extensively written.  While all of these asset bubbles are wildly pernicious and will have profound adverse future implications, hazards presented by the bond market bubble are especially notable.

Predicting the specific timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging. With that being said, my analyses continue to indicate that a near-term exceedingly large (from an ultra long-term perspective) stock market crash – that would also involve (as seen in 2008) various other markets – will occur. [note: the “next crash” and its aftermath has paramount significance and implications, as discussed in the post of January 6, 2012 titled “The Next Crash And Its Significance“ and various subsequent posts in the “Economic Depression” label]

As reference, below is a daily chart since 2008 of the S&P500 (through December 7, 2022 with a last price of 3933.92), depicted on a LOG scale, indicating both the 50dma and 200dma as well as price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3933.92 as this post is written

VIX Weekly And Monthly Charts Since The Year 2000 – December 6, 2022 Update

For reference purposes, below are two charts of the VIX from year 2000 through the December 5, 2022 close, which had a closing value of 20.75.

Here is the VIX Weekly chart, depicted on a LOG scale, with the 13- and 34-week moving averages, seen in the cyan and red lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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Here is the VIX Monthly chart, depicted on a LOG scale, with the 13- and 34-month moving average, seen in the cyan and red lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3995.49 as this post is written

S&P500 Charts Since 2009 And 1980 – December 6, 2022 Update

In the March 9, 2012 post (“Charts of Equities’ Performance Since March 9, 2009 And January 1, 1980“) I highlighted two charts for reference purposes.

Below are those two charts, updated through the latest daily closing price.

The first is a daily chart of the S&P500 (shown in green), as well as five prominent (AAPL, IBM, AMZN, SBUX, CAT) individual stocks, since 2005.  There is a blue vertical line that is very close to the March 6, 2009 low.  As one can see, both the S&P500 performance, as well as many stocks including the five shown, have performed strongly since the March 6, 2009 low:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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This next chart shows, on a monthly LOG basis, the S&P500 since 1980.  I find this chart notable as it provides an interesting long-term perspective on the S&P500′s performance.  The 20, 50, and 200-month moving averages are shown in blue, red, and green lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3998.84 as this post is written

Four Ultra Long-Term Charts Of Primary U.S. Stock Market Indices

StockCharts.com maintains long-term historical charts of various major stock market indices, interest rates, currencies, commodities, and economic indicators.

As a long-term reference, below are charts depicting various stock market indices for the dates shown.  All charts are depicted on a monthly basis using a LOG scale.

(click on charts to enlarge images)(charts courtesy of StockCharts.com)

The Dow Jones Industrial Average, from 1900 – December 2, 2022:

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The Dow Jones Transportation Average, from 1900 – December 2, 2022:

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The S&P500, from 1925 – December 2, 2022:

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The Nasdaq Composite, from 1978 – December 2, 2022:

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4042.66 as this post is written

Stock Market Capitalization To GDP – Through Q3 2022

“Stock market capitalization to GDP” is a notable and important metric regarding stock market valuation.  In February of 2009 I wrote of it in “Does Warren Buffett’s Market Metric Still Apply?”

On the Advisor Perspectives’ site there is an update depicting this “stock market capitalization to GDP” metric.

As seen in the December 2, 2022 post titled “Market Cap to GDP: August Buffett Valuation Indicator” two different versions are displayed, varying by the definition of stock market capitalization. (note:  additional explanation is provided in the post.)

For reference purposes, here is the first chart, with the stock market capitalization as defined by the Federal Reserve:

(click on charts to enlarge images)

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Here is the second chart, with the stock market capitalization as defined by the Wilshire 5000:

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As one can see in both measures depicted above, “stock market capitalization to GDP” continues to be at notably high levels from a long-term historical perspective.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4043.33 as this post is written

Markets During Periods Of Federal Reserve Intervention – December 4, 2022

In the August 9, 2011 post (“QE3 – Various Thoughts“) I posted a chart that depicted the movements of the S&P500, 10-Year Treasury Yield and the Fed Funds rate spanning the periods of various Federal Reserve interventions since 2007.

For reference purposes, here is an updated chart (through December 2, 2022) from the Advisor Perspectives’ site post of December 2, 2022 (“Treasury Snapshot…“):

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4071.70 as this post is written