Wednesday, March 04, 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."

On Monday, the
New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through February 2009 and its recession probability forecast through February 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (currently at 2.57%) 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 less than 1% on average through the next 12 months, below 1% by the end of the year, and only 0.57% by February 2010. The Treasury spread has been above 2% for the last 12 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.


At 3/04/2009 7:33 PM, Blogger PeakTrader said...

I think a stock market rally will begin before the end of the first quarter or a little sooner in roughly two weeks.

Liberals Game Plan

1. Convince enough Americans the past eight years were an economic failure (or, in effect, a free market failure).

2. Another "Lost Decade" or depression is inevitable, unless...

3. Huge government spending programs are enacted.

Obama's Win-Win Strategy

A. Lost Decade is correct: Blame Bush.

B. Lost Decade is incorrect: Credit Obama.

The Republicans have distance themselves from Bush's policies. However, the real U.S. economy has generally been ignored, including the "overabundance" of real assets and goods, substantially greater efficiencies of firms, and the government borrowing almost for free.

Moreover, the assumption is Bush hasn't been a fiscal conservative. However, his major problems arose from being too fiscally conservative, including fighting cheap wars and not being more fiscally aggressive during the financial crisis (the 2007 budget deficit was $162 billion or roughly 1% of GDP).

At 3/04/2009 11:50 PM, Anonymous Anonymous said...

Obama's Cap-and-trade plan will sink Michigan

President Barack Obama’s proposed cap-and-trade system on greenhouse gas emissions is a giant economic dagger aimed at the nation’s heartland — particularly Michigan. It is a multibillion-dollar tax hike on everything that Michigan does, including making things, driving cars and burning coal.

The carbon tax will be paid by energy companies, manufacturers and public utilities, who will pass the cost on to their consumers. Michigan will be especially targeted. It gets 60 percent of its electric power from coal plants, and the state's economy is still reliant on heavy manufacturing such as car and truck assembly and auto parts production.

Michigan will lose as carbon tax money is shifted to states with a greater presence of high-tech and service businesses.


Unfortunately, for Michigan, it will be more of the same.

Heh, you get what you vote for.

At 3/05/2009 9:55 AM, Anonymous Anonymous said...

Steve Leuthold, whose Grizzly Short Fund returned 74 percent last year betting against U.S. stocks, said now is the time to buy equities because investors are too fearful about the economy.

“These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,” he told Bloomberg Television in an interview today. “We’ve been in much worse, much more panicked and more scary situations in the U.S.” The economy isn’t as bad as it was in 1974, when stocks began rebounding, said Leuthold, who oversees $3.2 billion at Leuthold Weeden Capital Management in Minneapolis. He predicted the Standard & Poor’s 500 Index will surge to at least 1,000 in 2009, representing a gain of 44 percent from yesterday’s 12-year low of 696.33.

Because a rally is likely, Leuthold said investors shouldn’t buy his Grizzly Short Fund. It has returned 26 percent in 2009. Short seller Bill Fleckenstein, who warned of the housing bubble in 2005, closed his 13-year-old bear market fund last year because valuations made it “too dangerous” to bet on more losses, he said in a interview last month.


At 3/05/2009 2:42 PM, Blogger Mark A. Sadowski said...

The Fed's model will not work in our current predicament. The historical relationship between the slope of the yield curve and the economy’s performance is due to the fact that the long-term rate is essentially a prediction of future short-term rates. If investors expect the economy to decline, they also expect the Fed to cut rates, which tends to make the yield curve downwardly sloped. If they expect the economy to expand, they expect the Fed to raise rates, making the yield curve upwardly sloped.

But there's a problem with using the Fed's model right now (as even the Fed itself has acknowledged). It is only based on data collected since the 1950's. Thus the model does not include data from the last time we were in a liquidity trap (the Great Depression). The Fed can’t cut rates any more because they’re already at zero percent. All it can do is raise rates. So the long-term rate has to be above the short-term rate, because short-term rates might move up, but they sure can’t go down.

In fact, if one considers the most recent example of a country in a liquidity trap, Japan during the Lost Decade, you'll notice that the yield curve was upwardly sloped all the way through ten years of stagdeflation. In 1999-2000, when the zero interest rate policy (ZIRP) was in effect, long-term rates averaged about 2%, not too far below current rates in the United States.

The Fed's model almost certainly doesn't work in a liquidity trap. Those who are relying on it need to wake up to the fact that we are in ZIRP, and that is precisely where the Fed's model is completely useless.

At 3/05/2009 4:05 PM, Anonymous Anonymous said...

"...(the 2007 budget deficit was $162 billion or roughly 1% of GDP)..."

Wow, are there people out there who still actually believe our recent deficits have been under $200 billion? Will wonders never cease...

The national debt was around $6 trillion in 2000 and was around $20 trillion by 2008. That's an *average* of around $500 billion/year. There's nothing fiscally conservative about those numbers.

"... still reliant on heavy manufacturing such as car and truck assembly and auto parts production..."

So whom do you think is going to be making all the parts for the more efficient cars and trucks that are going to be churned out under the new system? If it's not Michigan, then they're the ones to blame - not the ones who put the system in place...

At 3/05/2009 7:23 PM, Blogger OBloodyHell said...

> The national debt was around $6 trillion in 2000 and was around $20 trillion by 2008.

Hey, for those numbers, did you figure in the USA's production of Pixie Traps, which was over US$ 5 Trillion dollars just in 2008 alone? They were really quite effective, too, capturing not less than 325 million asset-destroying pixies for later disposal in the landfills of Narnia.

Obama's greatest failure so far is, in fact, not investing in more Pixie Traps. And the market has responded to this obvious failure by sending the Dow to unprecedented values like 61+85i


As you can see, I can make up complete shit, too, but I usually make it obvious that I'm making shit up when I do it. Perhaps you might consider more carefully telegraphing your fictional techniques.

At 3/06/2009 1:29 AM, Anonymous Anonymous said...

Dear Sir,
You are living proof why I've never trusted an "economist."


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