The probability of a recession in the United States in the next 12 months hovers around 70%

In many ways, using the U.S. Treasury yield curve inversion to predict recessions is a lot like the old folk tale of the shepherd who cried wolf.

The curve itself first reversed when the 3-month constant maturity U.S. Treasury yield first exceeded the 10-year constant maturity U.S. Treasury level in October 2022. Since then, expectations that a recession would ensue have been frequently done without any official statement from the National Bureau of Economic Research to this effect in the months that followed. Each time it makes this decision, the NBER will identify the month in which economic expansion in the United States peaked before it began to contract, which will be month 0 of this newly declared recession. After which it will take longer for them to determine when it ended.

We followed a recession forecasting model developed for the Federal Reserve by Jonathan Wright in 2006, which uses the U.S. Treasury yield curve as an input, while also taking into account the level of the federal funds rate. This model initially projected a greater than 50% probability that a recession would ever be officially determined to have begun between March 2023 and March 2024. In subsequent months, the model's recession forecast exceeded an 80% probability. , which would apply for the months between July 2023 and July 2024.

Since then, the probability of recession calculated by the model has declined but still remains high. As shown in the following graph retracing the history of the Wright model's recession forecasts, it has recorded a double top and has been oscillating around the 70% threshold for several months. Please note that the chart is shifted twelve months to show the indicated recession probability at the end of the forecast period to which it applies.

In recent weeks, the spread between 10-year and 3-month constant-maturity U.S. Treasuries has widened, suggesting that the downward trend in the trajectory of recession probability may soon end. reverse. If this happens, we could see a triple top pattern forming, with the predicted recession probability continuing to hover around 70%. We rated the possibility of a triple top as unlikely in our previous update six weeks ago.

With the Federal Reserve increasingly expected to delay any changes to the federal funds rate until later in 2024, the latest Recession Probability Tracker update shows the recession probability ranges from 67% to 77%. percent, while the federal funds rate is held at an average of 5.33. %.

As for what else these charts show, the probability of recession peaked at nearly 81% on July 25, 2023, making the period from July 2023 to July 2024 the most likely period in which the National Bureau of Economic research will one day identify a precise moment. marking the peak of the US economic cycle before it enters a period of contraction. The prolonged rise in the federal funds rate, combined with the deeper inversion of the U.S. Treasury yield curve in recent weeks, has made the period between March 18, 2024 and March 18, 2025 the second period the most likely which will include the peak of an economic cycle which marks when a recession has begun.

The double-top model can, however, be seen as extending the period during which the highest recession probabilities apply. According to this interpretation, the period during which the probability of an official outbreak of a recession would be greater than 70% extends from July 25, 2023 to at least June 10, 2025.

Analyst Ratings

The Recession Probability Track is based on Jonathan Wright's yield curve recession forecasting model, which takes into account the average spread over a quarter between 10-year and 3-month constant maturity U.S. Treasury bonds. and the corresponding average level over a quarter of federal rates. Funds rate. If you would like to make this calculation using the latest available data to anticipate where the Recession Probability Tracker is heading, we have provided a tool to make this task easier.

We will continue to monitor the Federal Reserve Open Market Committee meeting schedule providing updates on the recession probability curve until the U.S. Treasury yield curve is no longer inverted and the probabilities of a future recession fall below a threshold of 20%. We are curious to see how this forecasting method works.

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Editor's note: The summary bullet points in this article were chosen by the Seeking Alpha editors.