Sunday, July 19, 2009

NY Fed Model: No Chance of Recession in 2010, Economic Recovery Is Probably Already Underway

A few weeks ago, the New York Fed just released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through June 2009, and the Fed's recession probability forecast through June 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.54% spread in June, the highest since May 2004) to calculate the probability of a recession in the United States twelve months ahead.

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 in almost every month (see chart above and chart below). For June 2009, the recession probability is only 1.27% and by June 2010 the recession probability is only .06%, the lowest level since May 2005.

Further, the Treasury spread has been above 2% for the last 15 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above). The pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession (see chart below).


Bottom Line: Looking forward to next year, the probability that the recession will continue into 2010 is close to zero. Further, the New York Fed's Treasury spread model suggests that an economic recovery is probably already underway.

8 Comments:

At 7/20/2009 6:59 AM, Anonymous JiangxiDad said...

Are there any inferences one should make from this data re. future growth? Any historical data avail. re. recessions ending and growth not occurring?

 
At 7/20/2009 8:14 AM, Blogger 1 said...

I've got to wonder if the New York Fed is working in some sort of reality vacuum...

 
At 7/20/2009 8:21 AM, Anonymous Anonymous said...

The NY Fed is operating under the assumption that an asset bubble is an end of a recession. That has been the Fed's assumption since the turn of the century.

 
At 7/20/2009 9:21 AM, Anonymous Junkyard_hawg1985 said...

Based on the yield curve in 1936-1937, I believe the NY fed would have predicted a 0% chance of recession in 1938. 1938 was described as the depression within a depression. Since there are a limited number of times that the country has a recession, being wrong once is a pretty high error rate for a 0% chance.

 
At 7/20/2009 11:00 AM, Blogger Tom said...

What is the chance of recession when the Dems are firing artillery into investors, vilifying business and profit, raising taxes, restricting energy, and taking over the medical industry? The interest rate spread is a also a measure of investor fear in the short run. They are fleeing to short-term notes for today, and fearful of massive inflation tomorrow.

 
At 7/20/2009 11:33 AM, Anonymous Junkyard_hawg1985 said...

I also exanded the chart to look closer at the data. In January 1973, the "chance of recession" for January 1974 was near zero by this model. January 1974 was the start of a pretty nasty recession. I don't think this is a good predictor.

 
At 7/20/2009 12:49 PM, Blogger Robert Miller said...

This comment has been removed by the author.

 
At 7/20/2009 12:50 PM, Anonymous Anonymous said...

Prior to the housing bubble's collapse, everyone operated under the assumption that house prices would never go down.

 

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