Tuesday, February 03, 2009

NY Fed's Model Predicts End of Recession in 2009

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

Yesterday, the
New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through January 2009 and its recession probability forecast through 2010 (see chart above, click to enlarge). The NY Fed's model uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

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 to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (.82% by January 2010). The Treasury spread has been above 2% for the last 11 months, a pattern consistent with the economic recoveries after the 1990-1991 and 2001 recessions.

Bottom Line: The New York Fed's Treasury spread model predicts the end of the recession in 2009.

Thanks to Andrew Greene for the tip.

Update: According to Brian Wesbury and Robert Stein in Forbes, "Some early warning signals suggest an economic recovery should start taking hold by mid-year."


At 2/03/2009 12:15 PM, Blogger Ironman said...

A projection of economic recovery beginning in mid-year is also supported by the latest projections for corporate earnings.

Odd choice of words by Wesbury and Stein. "Early warning signals" suggests something bad about to happen, and there are few who would think that an economic recovery would qualify as that!" Perhaps if they had written about "some leading growth indicators"....

At 2/03/2009 1:33 PM, Blogger Chris Janc said...

Because econometric modeling has proven itself so effective in the past?

At 2/03/2009 2:31 PM, Blogger Tom Nally said...

Isn't this a case for doing nothing?

Is it not possible that the economic recovery will coincide with insane levels of federal spending, and that Congress will conclude that the latter caused the former?


At 2/03/2009 3:30 PM, Blogger juandos said...

Hmmm, let's wait and see how those alledged Obama Tax Cuts work out first, eh?

At 2/03/2009 4:58 PM, Anonymous Anonymous said...

Stop, you are ruining the Obama hysteria!

How are we ever going to pass 1 trillion dollars of unconstitutional stimuli without Obama hysteria!

At 2/03/2009 4:58 PM, Anonymous Anonymous said...

Unless their model predicted the recission in the first place I'm not buying.

At 2/03/2009 6:38 PM, Anonymous Anonymous said...

Hey Anonymous,

check the graph. it did predict the recession. and the one before. and the one before that. and the one before that. and so on.

At 2/03/2009 7:34 PM, Anonymous Anonymous said...

Isn't there some self-fulfillment here, with the Fed playing with the rates?


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