Saturday, May 09, 2009

NY Fed Model Suggests Economic Recovery Has Started, and Recession Will End This Year

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

The
New York Fed just released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through April 2009, and the Fed's recession probability forecast through April 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (currently at 2.77%) to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (0.82% in December 2009). By April of 2010, the recession probability will be only 0.37%, close to the lowest level since mid-2005.

Further, the Treasury spread has been above 2% for the last 12 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above).

Bottom Line: My reading of the New York Fed's Treasury spread model suggests that an economic recovery is probably already underway, and the Fed's model predicts the end of the recession in 2009.

9 Comments:

At 5/09/2009 8:21 PM, Anonymous Anonymous said...

Yes, Mr. Miller. This is a green shoot, too.

 
At 5/09/2009 8:42 PM, Anonymous Anonymous said...

Yes but notice the double top in the early 1980s on the graph - let's just hope we don't see that now.

 
At 5/09/2009 9:06 PM, Blogger PeakTrader said...

The strength of the expansion will be interesting. The prior two recessions, in 1990-91 and 2001, were mild, and followed by slow recoveries. The 1981-82 recession was severe, and followed by a strong recovery. Also, it'll be interesting if there will be another powerful cyclical bull market in 2009-14, similar to 1995-00 and 2002-07.

I tend to believe, the Fed will be behind the curve tightening the money supply, fueling inflation, and greater tightening will be needed to control inflation. Also, there won't be another five-year cyclical bull market, because of government micromanagement. Consequently, the expansion will be slow.

 
At 5/09/2009 10:42 PM, Blogger Tiger Coach said...

More than likely these signs will be false positives...

The consumer is dead, and the debt model is not going to pick up any time soon...

Even with the government's hiring frenzy, unemployment will hit 11.5% by the end of summer

 
At 5/10/2009 6:49 AM, Blogger 1 said...

Personally I think Tiger Coach's comment is probably more accurate than the New York Fed's optimism...

I'm not seeing the glass 'half empty', I'm seeing a glass that has been empty for quite sometime...

I'm thinking that the New York Fed is not getting a grip on the real world...

The Cato Institute is taking a more jaundice eye towards what will impact economic recovery: The Shape of Waste to ComeSteven Malanga over at City Journal notes what happens when the federal government inserts itself into the housing sector and how calamity follows...

Chris Edwards at the Cato Institute sees the present administration biting the hand that nourished it: Resenting the Rich...

Personally I think its all a prescription for further economic disasters to train on through...

 
At 5/10/2009 7:40 AM, Blogger marketdoc said...

To paraphrase an old saying, "Buy now or forever hold your peace." Both the stock market and real eastate markets have been telegraphing signs for some time now that they are forming a base. We are no longer in a "free falling economy." Can something happen to change this? Of course, like Washington nationalizing the car companies (attempted but Chrysler said, "In your face.. we'll go bankrupt first.") Most of the stimulus money has not even hit the main stream economy yet and we are already seeing signs of recovery!! Everyone who has been "waiting for the bottom" has been left in the dust of the Dow's record returns and soon-to-follow real estate.

 
At 5/10/2009 6:45 PM, Blogger 1 said...

"Most of the stimulus money has not even hit the main stream economy yet and we are already seeing signs of recovery!!"...

What stimulus money?

This socialist stimulus crapoal has been tried before and found wanting...

 
At 5/11/2009 12:20 PM, Blogger Bruce Stram said...

If the stimulus spending really hasn't started and the end of the recession is in sight, why do we need the spending?

 
At 5/11/2009 7:25 PM, Blogger marketdoc said...

Bruce you ask an important question... Why did we need the stimulus package? Many have argued that we did not need the stimulus or TARP. In my opinion it is because Washington would like the general public to remain in a "crisis" mode so they can move forward more easily with their political agenda. Fear can be a great motivator.

 

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