The New York Fed just released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through August 2009, and the Fed's recession probability forecast through August 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.42% spread in August, the second highest spread since May 2004, just slighly below the 3.54% spread in June) 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 August 2009, the recession probability is only 1.45% and by August next year the recession probability is only .08%, the second lowest level since May 2005.
Further, the Treasury spread has been above 2% for the last 18 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).