Tuesday, January 05, 2010

NY Fed Treasury Spread Model: Recession Is Over and There's NO Chance of a Double-Dip Recession

Today the New York Federal Reserve released its updated "Probability of U.S. Recession Predicted by Treasury Spread" with data through December 2009, and the Fed's recession probability forecast through December 2010 (see top chart above). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.54% spread in December) to calculate the probability of a recession in the U.S. twelve months ahead.

The Fed's model (
data here) shows 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. For December 2009, the recession probability is only 0.82% (less than 1%) and by a year from now in December 2010 the recession probability is only .061%, or about 1/16 of one percent.

Further, the Treasury spread has been above 3% for the last eight months (since May), a pattern consistent with the economic recoveries following the last two recessions (see bottom chart above), and the 3.54% spread in December is the highest since May 2004, five-and-a-half years ago. Finally, the pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the patterns that signalled the end of the 1990-1991 and 2001 recessions.

According to the NY Fed model, the chances of a double-dip recession in 2011? Zero.

8 Comments:

At 1/05/2010 11:15 PM, Anonymous Anonymous said...

Of course the politicians will not allow a dip right now. They will let inflation run for a few year. Finally, they will be forced to raise rates causing a new inflation. Hit the gas. Hit the brake. Repeat. Meanwhile, the debt soars and the dollar sinks. Eventually, you will see a currency crisis when everyone dumps their dollars at the same time.

 
At 1/05/2010 11:19 PM, Anonymous Anonymous said...

Of course the politicians will not allow another dip right now. They will let inflation run for a few years. Finally, they will be forced to raise rates causing a new recession. Hit the gas. Hit the brake. Repeat. Meanwhile, the debt soars and the dollar sinks. Eventually, you will see a currency crisis when everyone dumps their dollars at the same time.

 
At 1/05/2010 11:40 PM, Blogger PeakTrader said...

Some people believe depressions or recessions are sometimes good for the country. How does standing in a soup line with idle resources, sitting around, help you or the country? Is it "cheaper" being unemployed than utilizing idle resources?

I think, it's possible to have a quick and massive Creative-Destruction process without a recession (2001 came close). There's only been four economic revolutions, Agricultural-Industrial-Information-Biotech. I believe, the more diversified the U.S. economy becomes, the more stable it becomes.

 
At 1/06/2010 10:51 AM, Blogger sethstorm said...


I think, it's possible to have a quick and massive Creative-Destruction process without a recession

The only thing that did was give rise to offshoring that has been largely hostile to all US citizens.

That's not a good thing at all.

 
At 1/06/2010 11:53 AM, Anonymous gettingrational said...

Sethstorm has made an excellent observation that outsourcing is creative/destruction. The first re-hiring will mainly be done at foreign facilities. We might not have a double-dip but full-time U.S. employment gains will be slow.

 
At 1/06/2010 12:19 PM, Anonymous lee said...

I'm surprised the odds are so low, the probability of a recession due to an unforeseen catastrophe (disease outbreak, weather catastrophe, panic caused by who knows what) would seem to be higher than 1/16 of one percent.

 
At 1/06/2010 1:23 PM, Anonymous morganovich said...

given how active the fed has been in the debt markets of late, i suspect this indicator is less useful that in the past.

if you alter the yield curve through massive debt purchases and by increasing banks holdings of fed debt through tier one requirements and ludicrously loose interest rate policy, the resulting spread does not mean what it would mean if it had been created by a free market.

 
At 1/06/2010 6:53 PM, Anonymous Dr. T said...

This metric works really well. Not.

Just prior to the 1960-61 recession, the predicted probability was 7%.

Just prior to the 1970 recession, the predicted probability was 33%.

Just prior to the 1974-75 recession, the predicted prabability was 6%.

Just prior to the 1980 recession, the predicted probability was 47%.

Just prior to the 1981-82 recession, the predicted probability was 2%. (It was 97% half a year earlier.)

Just prior to the 1990-91 recession, the predicted probability was 33%.

Just prior to the 2001 recession, the predicted probability was 20%.

Just prior to the 2007-09 recession, the predicted probability was 33%.

(Percentages are approximate based on reading the graph.)


With this track record, why would anyone pay any attention to Treasury spreads as predictors of recessions? Rolling dice would work as well.

 

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