Monday, June 06, 2011

NY Fed Model: 1-in-167 Chance of 2012 Double-Dip

The New York Federal Reserve recently updated its "Probability of U.S. Recession Predicted by Treasury Spread" with treasury yield data through May 2011, and the Fed's recession probability forecast through May 2012. The NY Fed's Treasury model uses the spread between the yields on 10-year Treasury notes (3.17% in December) and 3-month Treasury bills (0.04%) to calculate the probability of a U.S. recession up to twelve months ahead (see details here).

The Fed's model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 37-42% (see chart above), and has been declining since then in almost every monthAccording to the NY Fed, the odds of a double-dip recession in May 2012 are 0.60%, or about 1 in 167.

14 Comments:

At 6/06/2011 10:52 AM, Blogger The High Priest said...

Why the hell would we trust their data?

 
At 6/06/2011 10:54 AM, Blogger W.C. Varones said...

Aren't these the same guys who said house prices never experience national declines... subprime is contained... there won't be a recession in 2008?

A bigger bunch of clueless buffoons would be hard to find.

 
At 6/06/2011 11:01 AM, Blogger Randall said...

The posted chart would appear to disprove the theory. Multiple instances of declining spreads prior to previous recessions.

 
At 6/06/2011 11:10 AM, Blogger Rufus II said...

Pretty chart, or not, the folks around here are tapped out. Even the Fed will recognize it by Dec.

 
At 6/06/2011 11:27 AM, Blogger morganovich said...

how many times do we need to debunk this?

interest rate spreads are only meaningful (and even then only barely) if they are set my the market.

if they are set by the fed manipulating the bond market, then they show nothing about market expectations and this model becomes useless.

 
At 6/06/2011 11:27 AM, Blogger morganovich said...

"A bigger bunch of clueless buffoons would be hard to find."

try congress.

 
At 6/06/2011 11:41 AM, Blogger VangelV said...

I have news for you Mark. The real economy has never left the first dip. All that we saw was a massive injection of liquidity and some accounting gimmicks that have allowed for a slight increase in reported GDP. But housing is still in trouble. Car sales are not growing. Food and energy costs have gone up. Unemployment is near record highs. Treasury yields are falling. Stock prices have began to decline.

The bottom line is simple. The Fed's quantitative easing efforts have hidden the real picture from investors. That means that the Fed cannot afford to end QE2 without something else to take its place unless it wants a huge contraction again. The problem is that such a program, along with the lifting of the debt ceiling will cause purchasing power to collapse and the only way to hide the real slowdown is to continue to play accounting games.

 
At 6/06/2011 12:40 PM, Blogger James said...

Did these guys get it right the last time? What were they saying a year ago?

 
At 6/06/2011 1:31 PM, Blogger rjs said...

http://economix.blogs.nytimes.com/2011/06/06/economists-lower-g-d-p-forecasts-for-2nd-quarter/

btw, its no longer called a double dip (ie, something that would remind you of an ice cream cone) - it's now called a "soft patch", ie., something you'd just love to jump into...

 
At 6/06/2011 1:49 PM, Blogger juandos said...

No double dip recession?!?! Then why is the CARPE DIEM for sale at the low, low price of $68,000,000?...:-)

 
At 6/06/2011 10:58 PM, Blogger Mark Holder said...

Wow. The negativity of these comments leaves me more bullish. The chart is simple and speaks for itself. Regardless of what any Fed people thought or said, the yield curve is the best predictor of recessions. In the past, it appears that at the very top the very people that create these charts and data points abandon them.

When the Fed begins raising rates, the economy and markets can actually pick up steam likely as companies advance plans to borrow money before rates move higher. At some point though, the rug gets pulled out when the Fed moves too far, too fast and boom the yield curve turns negative and the market collapses. Until then, buy the dips.

 
At 6/07/2011 8:03 AM, Blogger morganovich said...

"The chart is simple and speaks for itself. Regardless of what any Fed people thought or said, the yield curve is the best predictor of recessions"

first off, this yield curve is not the same as others. it's being manipulated by the fed. the yield curve ought to reflect economic expectations, but it does not, it reflects massive fed buying. thus, even if it did usually work, there is no reason to trust it now. it's the economy that drives yield curve, not the other way around.

second, this is a terrible indicator historically. look at 1961, 1976, 1982, and even to some extent 2000 where it basically gave you no warning at all.

missing 50% of recessions entirely is not much of a batting average. also note that even in the depths of the worst recession since ww2, it registered only a 40% chance of recession.

i sure would not want to invest based on this sort of performance.

 
At 6/07/2011 12:25 PM, Blogger Buddy R Pacifico said...

Why is the Carpe Diem for sale?"

I think that the Professor deserves even better accomodations on the blue waters. Obviously more prosperous times ahead (167 to1) enable an expansion of wants from a vessel. (<:

 
At 6/07/2011 2:44 PM, Blogger VangelV said...

Regardless of what any Fed people thought or said, the yield curve is the best predictor of recessions.

In a free market you would be right. But in a market where bond buying is dominated by central banks and their proxies that is not the case. Even Bill Gross seems to have figured it out and has taken his fund away from the lower game where bond holders get gutted by inflation.

 

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