A decade ago, we published a monthly U.S. recession predictor based on the Fed’s term spread model. It correctly predicted a recession starting in late 2007.
We are now reviving the predictor. There is currently no sign of a coming recession. We’ll update it monthly. The latest analysis is based on January 2017 data.
The model predicts the probability of a recession starting 8 months out. The interactive graph below shows this probability over time, with actual recessions highlighted.
The data series used in the model are:
- NBER’s recession time series (1 if recession, 0 if no recession)
- The 10-year Treasury bond yield (Fed data series GS10)
- The 3-month Treasury bill yield (Fed data series TB3MS)
No predictive method is perfect. While the term spread method is statistically robust and has given accurate signals so far (1953-2016), but with two false positives, it is not guaranteed to work in the future.
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- The latest curve from the Fed, identical to ours except that it looks 1 year out, is found here.
- The careful reader may notice that the curve’s prediction for past periods is based on hindsight (since the entire time series is used up till today). Properly, each period should only use data up till that period. We ran such a model and it gives the same results.