Wednesday, August 11, 2010

NY Fed Model: No Chance of a Double-Dip in 2011

The New York Federal Reserve updated its "Probability of U.S. Recession Predicted by Treasury Spread" this week with treasury yield data through July 2010, and the Fed's recession probability forecast through July 2011 (see top chart above). The NY Fed's Treasury model uses the spread between the yields on 10-year Treasury notes (3.01% in July) and 3-month Treasury bills (0.16% in July) to calculate the probability of a U.S. recession up to twelve months ahead (see details here) using the spread between those two yields (2.85% in June, see bottom chart above).

The Fed's model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40% (see chart above), and has been declining since then in almost every month. For July 2010, the recession probability is only 0.06% and by a year from now in June of next year the recession probability is only slightly higher, at only 0.3137% (less than 1/3 of 1%).

According to the NY Fed Treasury Spread model, the chances of a double-dip recession through the middle of next year are essentially zero, see earlier CD post here.


At 8/11/2010 9:16 AM, Blogger juandos said...

So the fed doesn't see a chance of a double dip, eh?

Hmmm, is the fed taking into account POTENTIAL tax hikes?

I didn't see anything on the fed faq in the link provided...

Speaking of the New York Fed...

From Zero Hedge: New York Fed Completes $540 Million Reverse Repo Even As It Proceeds With QE Lite

At 8/11/2010 9:48 AM, Blogger Junkyard_hawg1985 said...

"All models are wrong, some models are useful." This particular model at this time is not particularly useful. The model breaks down when there are short term interest rates near zero (yield curve cannot invert). If you look at the interest rates on 3-mo treasuries since 1934, there has been only one other period when the 3-mo interest rates we below 0.2% as they are now. This was during the 1930's.

In 1936, the 3-mo yield ranged from 0.11-0.20%. The long term yield (10+ yr) ranged from 2.59-2.78%. Today, the 3-mo yield is 0.15% and the 10-yr yield is 2.72%. Both are in the 1936 range. Why is this improtant? Because the NY Fed's model would have put the chance of recession in 1937 at less than 1% based on the yield curve, yet there was a very nasty recession (or depression) in 1937-38.

We are at the same place on the yield curve that gave us a very nasty contraction.

At 8/11/2010 10:18 AM, Blogger morganovich said...

not even the fed believes this model at present.

they understand how adulterated the rate spread is at present. take it out of the LEI, and the SF fed is seeing a > 50% chance of double dip.

the notion that the current rate spread does not mean what it has historically meant is bolstered by the fact that money supply is shrinking when it ought to be growing (when else have you seen monetary contraction with a curve this steep?).

"From Travis Berge and Oscar Jorda at the San Franscisco Fed: Future Recession Risks

An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.

The authors make some adjustment to the LEI, including removing the yield curve:

However, the term structure may not presently be an accurate signal. Monetary policy has been operating near the zero lower bound to provide maximum monetary stimulus. In addition, the Greek fiscal crisis has generated a considerable flight to quality that has pushed down yields on U.S. Treasury securities. Indeed, ... omitting the rate-spread indicator generates far more pessimistic forecasts. For the period 18 to 24 months in the future, the probability of recession goes above 0.5, putting the odds of recession slightly above the odds of expansion."

At 8/11/2010 1:33 PM, Blogger morganovich said...

June’s trade deficit swelled 18.8% to $49.9 billion, the highest since October 2008. That was much worse than Wall Street predicted — or what the Commerce Department estimated in the recent Q2 GDP report. The new report, along with recent inventory data, suggest Commerce will revise down Q2 economic growth from the already-sluggish 2.4% annual rate to about 1%, according to Action Economics. Action Economics is looking for stronger retail inventory figures later this week that would imply a 1.4% GDP pace.

At 8/11/2010 4:56 PM, Blogger PeakTrader said...

Wall Street, the archenemy of the Obamanites, can lift us out of this disastrous mess by forcing U.S. corporations to maintain profit growth by hiring workers. Eventually, a virtuous cycle of employment-consumption can be generated.

Most recently, over much of the 2000s, Wall Street helped build the most efficient economy the world has ever seen, created and captured trillions of dollars of real wealth in the global economy, distributed that wealth to America's masses, and diversified the risk globally.

The Obamanites are meddling in too many things they don't really understand.

At 8/12/2010 11:08 AM, Blogger juandos said...

Today from MarketWatch:

Shiller sees double-dip recession if jobs aren't created

(short audio clip included)

At 8/13/2010 8:12 PM, Blogger Unknown said...

Whatchu talkin bout Willis?

The yield curve has been flattening all year, a sign of increasing economic uncertainty and a flight to safety.


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