Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Inches Closer to 60%
- By Dalvir Mandara and Bilal Hafeez
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- 2 min read
Recession fears are still growing. The rise in short-term rates continue to outpace that of longer-term rates with 2y yields up 38bps over the past 30 days compared to 22bps for the 10y. A combination of the two keeps the slope of the 2s10s curve flat which holds the odds of recession elevated. On top of this, the Atlanta Fed’s ‘GDPNow’ model that aims to ‘nowcast’ GDP growth, has forecasted a -2.1% growth for real GDP in the second quarter of 2022.
Our recession model, which uses the 2Y10Y part of the yield curve, currently assigns a 57% chance of recession within the next twelve months (Chart 1 and 3). That is up 3pp from last week. Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces a 7% chance of recession (Chart 2). This is up 4pp over the past 30 days.
Background to Models
We introduced two models for predicting US recessions using the slope of the yield curve. 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 2s10s curve. The 2Y better captures expectations for Fed hikes in coming years and is therefore more forward-looking.
