Thursday, August 14, 2014

Recession Probability Models – August 2014

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 August 12, 2014 using data through July) this “Yield Curve” model shows a 1.69% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 1.56% probability through June, and a chart going back to 1960 is seen at “Probability Of U.S. Recession Charts.” (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. (
Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.
This model, last updated on August 4, 2014, currently shows a .36% probability using data through May.
Here is the FRED chart (last updated August 4, 2014) :
Probability of recession
Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Marcelle Chauvet and Jeremy Piger; U.S. Recession Probabilities [RECPROUSM156N]; accessed August 13, 2014:
The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the August 8 post titled “The August 2014 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 12.1% probability of a U.S. recession within the next 12 months.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1946.72 as this post is written

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