Tuesday, May 11, 2010

Treasury Spread Model: NO Chance of Double-Dip

The New York Federal Reserve updated its "Probability of U.S. Recession Predicted by Treasury Spread" today with data through April 2010, and the Fed's recession probability forecast through April 2011 (see top chart above). The NY Fed's model uses the spread between 10-year (3.85% in April) and 3-month Treasury rates (0.16% in April) to calculate the probability of a recession in the U.S. 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 35-40%, and has been declining since then in almost every month. For April 2010, the recession probability is only 0.37% (about 1/3 of 1%) and by a year from now in April 2011 the recession probability is only .041%, the lowest reading since September 1993.

According to the NY Fed Treasury Spread model, the recession ended sometime in middle of 2009, and the chances of a double-dip recession through early 2011 are essentially zero.


At 5/11/2010 7:42 PM, Blogger PeakTrader said...

I stated before, the stock market rally over the past 14 months may have spurred economic growth more than monetary and fiscal policies, although the recovery has been weak.

Over the next year, home prices may need to rise to maintain the expansion, or accelerate growth, which would reflect increased demand and eventually more homebuilding. Also, there may be a wealth effect and a strengthening of weak household balance sheets.

Median home prices up in 1Q
4 hours ago

The NAR is projecting prices will increase "very modestly" in the second half of this year, assuming unemployment and the economy don't take a turn for the worse.

The national median price was $166,100, or 0.7 percent below the first quarter of last year. Sales of foreclosures and other distressed properties made up 36 percent of all sales.

With the housing tax credits now over, many experts anticipate home sales will soften in the near term, and that could syphon some of the momentum in home price increases.

Prices also could be hurt as banks unload their backlog of foreclosed homes. And despite rising prices, nearly a quarter of all U.S. homeowners with a mortgage still owe more on their loans than their homes are worth.

That's why many housing experts project home prices will remain almost flat for the next two years, according to a survey of leading economists by the Associated Press last month.

At 5/11/2010 7:51 PM, Blogger PeakTrader said...


"When you buy a new home...you're injecting a dose of adrenaline into the American labor market. Building a home requires architects to design plans, workers to hammer nails, and manufacturers to provide everything from lumber to bulldozing equipment. Purchasing a previously owned home also provides an employment jolt. By the time you sign the closing documents, you'll have created demand for real estate agents, lawyers, appraisers, inspectors, and mortgage lenders. And once you move in, you'll probably make a few more purchases, helping to support jobs for makers of carpets, home appliances, furniture, and other goods."

At 5/11/2010 8:02 PM, Anonymous Anonymous said...

OK, this appears to be complete voodoo to me. It certainly doesn't qualify as anything that can be called "corollary". The treasury spread peaks at the beginning of a recession, at the end of a recession and during "boom" periods in the late nineties when there is no recession.

The ten-year minus three-month doesn't peak during any recessions, so maybe it is just the up trend that signifies a recession, except when continued up-trend signifies the end of a recession or even a boom, as was the case in the late nineties.

At 5/12/2010 2:24 AM, Anonymous Anonymous said...

This is exciting news, because if we're not in recession now, I'd hate to know what a double dip would feel like.

At 5/12/2010 3:34 AM, Blogger PeakTrader said...

The Greek fiscal debt crisis could've initiated a global depression, similar to the U.S. financial crisis in 2008, even with the (short-term) Fed Funds Rate effectively below zero, because of the quantitative easing, and the 10-year bond yield above zero.

At 5/12/2010 7:42 AM, Anonymous Eric H said...

Aren't these the same folks who absolutely refuse to be audited (and as of yesterday our complicit Senate agrees)?

Why should you believe the data?

At 5/12/2010 7:55 AM, Blogger juandos said...

Most of the economic activity we’ve seen has been fueled by government deficit spending.
What happens as that spending dries up? What happens when we’re faced with paying off the deficits that spending created with higher taxes?

U.S. Home Prices: Signs of the Dreaded Double Dip?

At 5/12/2010 8:47 AM, Anonymous morganovich said...

if the fed makes unprecedented purchases of massive amounts of treasuries and changes the shape of the yield curve while simultaneously holding rates at an unprecedented low, is this historical model even relevant (assuming it ever worked)?

if they have such a simple and predictive model for recessions, how is it they have failed to see them coming every time?

At 5/12/2010 1:52 PM, Blogger bobble said...

ok, this indicator has some misses.

on the long term chart for this indicator there is only one double dip recession in the last 70 years, 1980-1982. looking at the detail xls that backs this up, in the three months prior to the double dip in 1982 this indicator had a probability of .06, .01, and .02

another miss; the indicator reached zero in feb 1973. yet 10 months later later, dec 1973, a recession started

At 5/12/2010 3:26 PM, Anonymous Anonymous said...

If this indicator is wrong this time, it's not a result of interest rates giving the wrong signal.

It'll be due to unprecedented waves of legislation, regulation and taxes overwhelming the recovery.

At 5/12/2010 5:04 PM, Anonymous Anonymous said...

The fed has reopened its swap window with major world banks so it will once again be expansory,sending greenbacks out into the worlds dragging banks that need a fix.
Watch for a further devaluation of the US dollar and the following possible inflation particularly in non obvious countries.

At 5/12/2010 5:27 PM, Anonymous grant said...

anon 8:02
Welcome Kommradd to the brave new world.
This is not a free market economy because the central planners are still running it.
I think PT will be right but I am not totally sure about his description of the passage he takes to get there.


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