Spread Recession Forecasts | Ecobrowser

Yesterday’s Bloomberg article “Fed officials see a 50/50 chance of a recession” prompted me to look into the impact of recent data on term spreads. Figure 1 shows recession probabilities calculated using a simple probit model based on 10-year-3 month and 10-year-2 year spreads up to November 23rd.

Figure 1: Projected recession probability from 10-year to 3-month maturity spread (blue), 10- to 2-year maturity spread (yellow), 10- to 3-month maturity spread, FCI-adjusted, 10 to 3-month maturity spread (green). All models are rated for 1986M01-2022M11. Peak-to-trough dates as determined by the NBER are in grey. Red dotted line with 50% probability. Source: author’s calculations, NBEI.

Although neither the 10yr-3month model nor the 10yr-2yr model exceeds the 50% threshold, they are close enough to merit a 50-50 score.

In work Ahmed and Chinn (2022), shows that foreign time spreads and the financial conditions index have additional predictive power for US recessions (see Table A.1). I supplemented the 10-year-3-month spread with the average of the 10-year-3-month spreads for Germany and Eurozone/UK/Japan and the National Financial Conditions Index to arrive at the estimated recession probability shown by the green line in Figure 1. November 2023 is 56%.

All of these estimates are based on the following maturity spreads:

Figure 2: US Treasury for 10 years to 3 months (blue), 10 to 2 years (tan) and G3 Germany/UK/Japan for 10 years to 3 months (green), all in %. Peak-to-trough dates as determined by the NBER are in grey. Source: Treasury via FRED, OECD fundamentals, NBER and author’s calculations.