Thursday, August 06, 2009

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

A few days ago, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through July 2009, and the Fed's recession probability forecast through July 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.38% spread in June, the second 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 July 2009, the recession probability is only 0.97% and by July 2010 the recession probability is only .09%, the second lowest level since May 2005.

Further, the Treasury spread has been above 2% for the last 17 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).

Originally posted at Carpe Diem.


At 8/06/2009 1:01 PM, Anonymous Junkyard_hawg1985 said...

Looking at the chart, in January 1973, it looked like the probability of a recession in January 1974 (12 month delay) was also 0%, yet there was a recession in January 1974. Likewise, the treasury yield spread in 1937 would have put the probability of a recession in 1938 near zero, and yet we had the depression within a depression. "All models are wrong; some models are useful." I don't find this model useful.

At 8/06/2009 6:53 PM, Blogger 1 said...

Hmmm, I wonder what the NY Fed thinks of Roubini?

From Bloomberg: Roubini, chairman of Roubini Global Economics and a professor at NYU’s Stern School of Business, predicted on July 23 that the global economy will begin recovering near the end of 2009 before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth...

At 8/06/2009 7:21 PM, Anonymous Anonymous said...

I don't think that the power of nimrods in government to affect changes in consumer confidence and spending should be overlooked here. It may be that "things are looking up," but that is largely predicated on the Obama admin and the Dem Congress NOT getting their way about the wealth-destroying policies that they have been trying to cram down our collective throats. Things can still change for the worse.


At 8/06/2009 9:27 PM, Anonymous gettingrational said...

"No chance of recession in 2010" is a very bold statement that I would like to believe. BUT it is going to take a lot of hard work breaking down protected markets for U.s. exports for this to become a reality. The U.S. consumer has to pay off huge debt; so the foreign protectorets that want to give their citizens a better life need to buy U.S. goods and serivces to complete the grand bargain that the U.S. has been carrying for so many years.

At 8/06/2009 11:26 PM, Anonymous Anonymous said...

Good God man, just listen to yourself!

This index which is supposed to estimate the probability of recession peaked in October 2007 to April 2008 at 35-40%.

Do you not see something terribly wrong here? Since we are IN a damned recession the index should have peaked at 100 percent at some point in the last year!

Recessions are not draws of a random variable. Discussing the 'probability of a recession' is nonsense. The closest analogy is a rain forecast where in X percent of situations exhibiting a particular set of atmospheric readings, there was rain the following day.

Rain is rain. It's water falling from the sky. There is no clearcut definition of a recession - a downturn in the economy. How far? How long? How is an aggregate downturn measured?

Ultimately a 'recession' is a judgment call of a bunch of white men in a formerly smoke filled room. These men have political motivations, financial interests, reputational concerns, and differences in opinion. I don't need to be a weatherman to know which way the wind blows.

This recession will be over this year with 100% probability because the men in that room who make the determination for all of us WANT it to be over this year. The millions of Americans without jobs until 2011, 2012 or 2013 won't think this recession is over. They can't eat your Green Shoots and won't survive on Obama's glimmers of hope.

If we have a double dip, people like you will still say you called it right. You're a bunch of witch doctors who take credit for making it rain after you dance but always have a reason why it didn't rain after you dance, just in case.

The macroeconomy doesn't follow laws of nature like water droplets in a rain cloud. Recessions aren't over when we start recovering any more than a car accident victim is 'healing' when his blood starts to coagulate. Recessions are over when the economy is back at its long-run trend growth rate and that rate is an amalgamation of trillions of economic decisions. Like most population parameters they are known but to God.

At 8/06/2009 11:55 PM, Anonymous Anonymous said...

Anon, your cynicism is showing. Also, a bit of ignorance about how how the NBER operates and who is a part of that organization. It's fairly easy to launch an uninformed tirade...try to make a case without using tired cliches and leftist drivel next time.


At 8/07/2009 9:32 AM, Blogger Mark A. Sadowski said...

As the FRBNY says about its own model:

"Parameters estimated using data from January 1959 to December 2007, recession probabilities predicted using data through July 2009."

Was the left hand side of the yield curve ever pinned to zero during that period? Not even the FRBBY places much faith in this model during a liquidity trap. Short term interest rates can't go down but longer term rates sure can go up. Mark Perry keeps peddling this model without really understanding it.

At 8/07/2009 10:24 AM, Anonymous Anonymous said...

How much credence are we supposed to put in a predictive model that never went above 50% likelihood of recession while the country was going through "the worst economic crisis since the Great Depression"?

Besides which, anything model that assigns a zero probability of a recession at any point in time, much less this point in time, is obviously fundamentally flawed.

It all just sounds like more establishment cheerleading for the economy. Just wishing the economy was healthy does not make it so. All evidence in the real world indicates there's definitely a non-zero chance of recession in 2010.

At 8/07/2009 10:56 AM, Anonymous Anonymous said...

Given that the Fed is now aggressively monetizing treasury debt, i.e. buying down 10 year rates, this metric is ABSOLUTELY MEANINGLESS, along with the other statistics and lies your government is currently feeding you.

It doesn't mean a recovery isn't happening, sure, but I won't take the government's word for it and neither should you.

At 8/07/2009 11:07 AM, Blogger knowledgeable1 said...

I hate to be a mathematical stickler (but I sure wish the NY Fed was) but anyone who has ever placed a bet -- which it appears the NY Fed is doing -- knows that there is no such thing as a 0% chance. Hence use of the word 'chance'.

Loose usage of statistical terminology here doesn't inspire confidence in the institution. How about, "the chances are very minimal."

At 8/07/2009 11:16 AM, Anonymous Anonymous said...

Has anyone, especially you Professor, heard of Quantitative Easing or the blatant manipulation of the entire yield curve? Among other biased indices/indicators, this one has to be the WORST, by far.

At 8/07/2009 11:21 AM, Anonymous Anonymous said...

Shame on you Professor

At 8/07/2009 11:22 AM, Blogger knowledgeable1 said...

I have read that data and I stand corrected. The NY Fed made no pronouncement but set the chances at less than 1%. Serves the my purposes. Now the question is whether I believe them.

At 8/07/2009 11:45 AM, Anonymous Anonymous said...

Some of these academics should have been banned, or sent with the Greedy Bankers to the cornfields in Minnesota or Iowa. "Schools are Stupid" - that is what my work supervisor told me some 35 years ago in my first job out of college.

Most schools become ghettos. They become a haven of foreign students who need that meager cash to send home to their parents and relatives.

When is this Bubble going to end?


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