Recession Probability Models

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 February 4, using data through January) this “Yield Curve” model shows a 4.48% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 5.74% probability through December.

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)

This model, last updated on February 1, 2013, currently shows a .22% probability using data through November.

Here is the FRED chart (last updated February 1) :

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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 February 8 post titled "The February 2013 Wall Street Journal Economic Forecast Survey" economists surveyed averaged a 17% 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 February 8 post titled "Long-Term Charts Of The ECRI WLI & ECRI WLI,Gr. – February 8, 2013 Update") that believe the U.S. is already experiencing a recession.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1515.46 as this post is written