Economics & Growth | Monetary Policy & Inflation
Recession Probabilities Approaching 50%
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
We introduced two models for predicting US recessions using the slope of the yield curve (see below for more details). The first model using the Fed methodology still only has a US recession probability of 4% (Chart 1). However, the second model, our favoured Macro Hive one, continues to give an increasing probability of recession. It is now giving a probability of 45% (Chart 2). For comparison, we started 2022 with a probability of 18% so the current probabilities are 27pp higher than this level.
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We introduced two models for predicting US recessions using the slope of the yield curve (see below for more details). The first model using the Fed methodology still only has a US recession probability of 4% (Chart 1). However, the second model, our favoured Macro Hive one, continues to give an increasing probability of recession. It is now giving a probability of 45% (Chart 2). For comparison, we started 2022 with a probability of 18% so the current probabilities are 27pp higher than this level.
We still agree with the high probability of recession. The three biggest factors are a flattening or inversion of the yield curve, commodity price shocks and Fed tightening.
The Models
When long-term yields start to fall towards or below short-term yields, the curve flattens or inverts. This has often predicted a recession in subsequent months. One model from the Fed is based on the 3m10y curve and the second is our modified version based on the 2y10y curve. The two-year would better capture expectations for Fed hikes in coming years. It is therefore more forward-looking. So, our preferred yield curve is the 2y10y curve (10-year yields minus two-year yields).
