Recession Probability Models – May 2023

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 May 4, 2023 using data through April 2023) this “Yield Curve” model shows a 68.2214% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 57.7709% probability through March 2023, 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 May 1, 2023 currently shows a .66% probability using data through March 2023.

Here is the FRED chart (last updated May 1, 2023):

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed May 8, 2023:  
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 April 17, 2023 post titled “The April 2023 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 61% 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 4138.17 as this post is written

Building Financial Danger – May 8, 2023 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 May 5, 2023 with a last price of 4136.25), 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 4131.37 as this post is written

Monthly Changes In Total Nonfarm Payroll – May 5, 2023 Update

For reference purposes, below are five charts that display growth in payroll employment, as depicted by the Total Nonfarm Payroll measures (FRED data series PAYEMS).

PAYEMS, which is seasonally adjusted, is defined in Financial Reserve Economic Data [FRED] as:

All Employees: Total Nonfarm, commonly known as Total Nonfarm Payroll, is a measure of the number of U.S. workers in the economy that excludes proprietors, private household employees, unpaid volunteers, farm employees, and the unincorporated self-employed. This measure accounts for approximately 80 percent of the workers who contribute to Gross Domestic Product (GDP).

This measure provides useful insights into the current economic situation because it can represent the number of jobs added or lost in an economy. Increases in employment might indicate that businesses are hiring which might also suggest that businesses are growing. Additionally, those who are newly employed have increased their personal incomes, which means (all else constant) their disposable incomes have also increased, thus fostering further economic expansion.

Generally, the U.S. labor force and levels of employment and unemployment are subject to fluctuations due to seasonal changes in weather, major holidays, and the opening and closing of schools. The Bureau of Labor Statistics (BLS) adjusts the data to offset the seasonal effects to show non-seasonal changes: for example, women’s participation in the labor force; or a general decline in the number of employees, a possible indication of a downturn in the economy. To closely examine seasonal and non-seasonal changes, the BLS releases two monthly statistical measures: the seasonally adjusted All Employees: Total Nonfarm (PAYEMS) and All Employees: Total Nonfarm (PAYNSA), which is not seasonally adjusted.

The series comes from the ‘Current Employment Statistics (Establishment Survey).’

The source code is: CES0000000001

The first chart shows the monthly change in Total Nonfarm Payroll from the year 2000 through the current April 2023 report (April 2023 value of 253 (Thousands)):

(click on charts to enlarge images)

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: All Employees: Total Nonfarm [PAYEMS] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023; https://fred.stlouisfed.org/series/PAYEMS

The second chart shows a longer-term chart of the same month-over-month change in Total Nonfarm Payroll (reports of February 1939 through the present report of April 2023):

The third chart shows the aggregate number of Total Nonfarm Payroll, from the reports of January 1939 – April 2023 (April 2023 value of 155.673 million):

The fourth chart shows this same measure of aggregate number of Total Nonfarm Payroll as seen above but presented on a LOG scale:

Lastly, the fifth chart shows the Total Nonfarm Payroll number on a “Percent Change from Year Ago” basis from January 1940 – April 2023: (April 2023 value of 2.6%)

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4121.95 as this post is written

Average Hourly Earnings Trends

I have written many blog posts concerning the worrisome trends in income and earnings.

Along these lines, one of the measures showing disconcerting trends is that of hourly earnings.

While the concept of hourly earnings can be defined and measured in a variety of ways, below are a few charts that I believe broadly illustrate problematic trends.

The first chart depicts Average Hourly Earnings Of All Employees: Total Private (FRED series CES0500000003)(current value = $33.36):

(click on chart to enlarge image)(chart last updated 5-5-23)

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Average Hourly Earnings of All Employees:  Total Private [CES0500000003] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023: 
http://research.stlouisfed.org/fred2/series/CES0500000003

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This next chart depicts this same measure on a “Percentage Change From A Year Ago” basis.   While not totally surprising, I find the decline from 2009 and subsequent trend to be disconcerting:

(click on chart to enlarge image)(chart last updated 5-5-23)

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There are slightly different measures available from a longer-term perspective. Pictured below is another measure, the Average Hourly Earnings of Production and Nonsupervisory Employees – Total Private (FRED series AHETPI)(current value = $28.62):

(click on chart to enlarge image)(chart last updated 5-5-23)

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Average Hourly Earnings of Production and Nonsupervisory Employees:  Total Private [AHETPI] ; U.S. Department of Labor: Bureau of Labor Statistics;  accessed May 5, 2023: 
http://research.stlouisfed.org/fred2/series/AHETPI

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Pictured below is this AHETPI measure on a “Percentage Change From A Year Ago” basis.   While not totally surprising, I find the decline from 2009 and subsequent trend to be disconcerting:

(click on chart to enlarge image)(chart last updated 5-5-23)

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I will continue to actively monitor these trends, especially given the post-2009 dynamics.

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4116.73 as this post is written

U-3 And U-6 Unemployment Rate Long-Term Charts As Of May 5, 2023

Shortly after each monthly employment report I have been posting a continual series titled “3 Critical Unemployment Charts.”

Of course, there are many other employment charts that can be displayed as well.

For reference purposes, below are the U-3 and U-6 Unemployment Rate charts from a long-term historical perspective.  Both charts are from the St. Louis Fed site.  The U-3 measure is what is commonly referred to as the official unemployment rate; whereas the U-6 rate is officially (per Bureau of Labor Statistics) defined as:

Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force

Of note, many economic observers use the U-6 rate as a (closer) proxy of the actual unemployment rate rather than that depicted by the U-3 measure.

Here is the U-3 chart, currently showing a 3.4% unemployment rate:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Civilian Unemployment Rate [UNRATE] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023: 
http://research.stlouisfed.org/fred2/series/UNRATE

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Here is the U-6 chart, currently showing a 6.6% unemployment rate:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons  [U6RATE] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023:  
http://research.stlouisfed.org/fred2/series/U6RATE

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4111.93 as this post is written

3 Critical Unemployment Charts – May 2023

As I have commented previously, as in the October 6, 2009 post (“A Note About Unemployment Statistics”), in my opinion the official methodologies used to measure the various job loss and unemployment statistics do not provide an accurate depiction; they serve to understate the severity of unemployment.

However, even if one chooses to look at the official statistics, the following charts provide an interesting (and disconcerting) long-term perspective of certain aspects of the officially-stated unemployment (and, in the third chart, employment) situation.

The three charts below are from the St. Louis Fed site.  Here is the Median Duration of Unemployment (current value = 8.4 weeks):

(click on charts to enlarge images)(charts updated as of 5-5-23)

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Median Duration of Unemployment [UEMPMED] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023:  
http://research.stlouisfed.org/fred2/series/UEMPMED

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Here is the chart for Unemployed 27 Weeks and Over (current value = 1.156 million):

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Civilians Unemployed for 27 Weeks and Over [UEMP27OV] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023: 
http://research.stlouisfed.org/fred2/series/UEMP27OV

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Here is the chart for Total Nonfarm Payroll (current value = 155.673 million):

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: All Employees: Total Nonfarm [PAYEMS] ; U.S. Department of Labor: Bureau of Labor Statistics; accessed May 5, 2023:  
https://research.stlouisfed.org/fred2/series/PAYEMS

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Our unemployment problem is severe.  The underlying dynamics of the current – and especially future – unemployment situation remain exceedingly worrisome.  These dynamics are numerous and complex, and greatly lack recognition and understanding.

My commentary regarding unemployment is generally found in the “Unemployment” category.  This commentary includes the page titled “U.S. Unemployment Trends,” which discusses various problematical issues concerning the present and future employment situation.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4061.22 as this post is written

Jerome Powell’s May 3, 2023 Press Conference – Notable Aspects

On Wednesday, May 3, 2023 FOMC Chair Jerome Powell gave his scheduled May 2023 FOMC Press Conference. (link of video and related materials)

Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of May 3, 2023, with the accompanying “FOMC Statement.”

Excerpts from Chairman Powell’s opening comments:

Good afternoon. Before discussing today’s meeting, let me comment briefly on recent developments in the banking sector.  Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient.  We will continue to monitor conditions in this sector.  We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.  As a first step in that process, last week we released Vice Chair for Supervision Barr’s Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank.  The review’s findings underscore the need to address our rules and supervisory practices to make for a stronger and more resilient banking system, and I am confident that we will do so.

also:

Today, the FOMC raised its policy interest rate by 1/4 percentage point.  Since early last year, we have raised interest rates by a total of 5 percentage points in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.  We are also continuing to reduce our securities holdings.  Looking ahead, we will take a data-dependent approach in determining the extent to which additional policy firming may be appropriate.  I will have more to say about today’s monetary policy actions after briefly reviewing economic developments.

also:

At today’s meeting the Committee raised the target range for the federal funds rate by 1/4 percentage point, bringing the target range to 5 to 5-1/4 percent.  And we are continuing the process of significantly reducing our securities holdings.  

With today’s action, we have raised interest rates by 5 percentage points in a little more than a year.  We are seeing the effects of our policy tightening on demand in the most interestrate-sensitive sectors of the economy, particularly housing and investment.  It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.  

also:

We remain committed to bringing inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.  Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.  Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.

Excerpts of Jerome Powell’s responses as indicated to various questions:

STEVE LIESMAN.  Oh, thank you. Steve Liesman, CNBC. Can you tell us what the Federal Reserve Board did in the wake of that February presentation where you informed that Silicon Valley Bank and other banks were experiencing interest rate risks? And can you tell me what supervisory actions you’ve done in the wake of the recent bank failures to make sure that banks are currently appropriately managing interest rate risk. And kind of part 3 but it’s all the same question here, do you still think this separation principle that monetary policy and supervision can be handled with different tools? Thank you. 

CHAIR POWELL.  Sure. So, the February 14 presentation, I didn’t remember it very well. But now, of course, I’ve gone back and looked at it very carefully. I did remember it. And what it was, was a general presentation. It was an informational briefing of the whole board, the entire board. I think all members were there. And it was about interest rate risk in the banks and lots of data. And there was one page on Silicon Valley Bank, which talked about, you know, the amount of losses they — mark to market losses they had in their portfolio. There was nothing in it about — that I recall, anyway, about the risk of a bank run. So, it was — I think the takeaway was they were going away to do an assessment, a vertical — sorry, horizontal assessment of banks. It wasn’t — it wasn’t presented as an urgent or alarming situation. It was presented as an informational non-decisional kind of a thing. And I thought it was a good presentation and, as I said, did remember it. In terms of what we’re doing, of course, I think banks themselves are — many, many banks are now attending to liquidity and taking opportunity now, really, since the events of early March, to build liquidity. And you asked about the separation principle. I — you know, like so many things, it’s very useful. But, you know, ultimately, it has its limits. I mean, I think in this particular case, we have found that the monetary policy tools and the financial stability tools are not in conflict. They’re both — they’re working well together. We’ve used our financial stability tools to support banks through our lending facilities. And, at the same time, we’ve been able to use our monetary policy tools to foster maximum employment and price stability. 

STEVE LIESMAN.  Mr. Chairman, I’m sorry. I don’t mean to be argumentative, but the staff report said SVB has significant interest rate risk. It said, interest rate risk measurements failed at SVB. And it said, Banks with large unrealized losses face significant safety and soundness risks. Why was that not alarming? 

CHAIR POWELL.  Well, I mean, I didn’t say it wasn’t alarming. It was — they’re pointing out something that they’re working on and that they’re on the case, that — that, you know, that I’m not sure whether they mentioned — I think they did, actually. They mentioned that they had taken regulatory action matter or supervisory action in the form of matters requiring attention. So I think that was also in the presentation. I think it was to say, yes. This is a bank and there are many other banks that are experiencing this — these things, and we’re on the case. 

also:

EDWARD LAWRENCE. Thank you very much, Chair Powell. Edward Lawrence with Fox Business. So, if the Federal Reserve gets down to the 3 percent inflation as the projections show at the end of this year or close to it, would it be okay for you for a prolonged period of 3 percent inflation and hoping for some outside event to move down to 2 percent target?

CHAIR POWELL.  Look. I think we’re always going to have 2 percent as our target, and we’re always going to be focusing on getting there. You would be okay with a prolonged 3 percent. You know, it’s — let me just say that’s not what we’re looking for. We’re looking for inflation going down to 2 percent over time. I mean, we — that’s not a question that’s in front of us, and it would depend on so many other things. But ultimately, we’re not looking to get to 3 percent and then drop our tools. We have a goal of getting to 2 percent. We think it’s going to take some time. We don’t think it’ll be a smooth process. And, you know, I think we’re going to – we’re going to need to stay at this for a while. 

EDWARD LAWRENCE.  How does the other side of the mandate, the jobs side, once you get to 3 percent, going from 3 to 2, how does the other side of the mandate balance? 

CHAIR POWELL. I think they — you know, they will both matter equally at that point. Right now, you have a labor market that’s still extraordinarily tight. You still got 1.6 job openings, even with the lower job openings number for every unemployed person. We do see some evidence of softening in labor market conditions. But, overall, you’re near a 50-year low in unemployment. Wages, you all will have seen that the wage number from late last week, and it’s — whenever it was. And, you know, it’s a couple of percentage points above what would be — what would be consistent with 2 percent inflation over time. So, we do see some softening, we see new labor supply coming in. These are very positive developments. But the labor market is very, very strong, whereas inflation is, you know, running high, well above our — well above our goal. And right now, we need to be focusing on bringing inflation down. Fortunately, we’ve been able to do that so far without unemployment going up.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4060.13 as this post is written