The other days Bloomberg post “Fed Personnel Sees a 50-50 Opportunity of Economic downturn” stimulated me to analyze the implications of the latest readings on term spreads. Figure 1 portrays the recession likelihoods approximated utilizing an easy probit model based on the 10yr-3mo and 10yr-2yr spreads, through November 23rd.
Figure 1: Forecasted likelihood of economic downturn from 10yr-3mo term spread (blue), from 10yr-2yr term spread (tan), 10yr-3mo term spread enhanced by FCI, foreign term spread (green). NBER specified peak-to-trough recession dates shaded gray.
While neither the 10yr-3mo and 10yr-2yr models breach the 50% threshold, they are sufficiently close to merit a 50-50 reading.
In work by Ahmed and Chinn (2022 ), its shown that the foreign term spreads and financial conditions index have extra predictive power for US recessions (see Table A. 1). I augment the 10yr-3mo spread with the average of German-Euro Area/UK/Japan 10yr-3mo spreads, and the national financial conditions index, to get the approximated possibilities of recession revealed in the green line in Figure 1. The reading for November 2023 is 56%.
All these quotes are based upon the following term spreads:
This entry was posted on November 24, 2022 by Menzie Chinn.
Figure 1: Forecasted possibility of economic downturn from 10yr-3mo term spread (blue), from 10yr-2yr term spread (tan), 10yr-3mo term spread enhanced by FCI, foreign term spread (green). In work by Ahmed and Chinn (2022 ), its shown that the foreign term spreads and monetary conditions index have additional predictive power for US economic crises (see Table A. 1). I augment the 10yr-3mo spread with the average of German-Euro Area/UK/Japan 10yr-3mo spreads, and the nationwide monetary conditions index, to obtain the estimated possibilities of economic downturn shown in the green line in Figure 1.
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Figure 2: United States Treasury 10yr-3mo term spread (blue), 10yr-2yr (tan), and G3 Germany/UK/Japan 10yr-3mo (green), all in %. NBER specified peak-to-trough recession dates shaded gray. Source: Treasury through FRED, OECD Main Economic Indicators, NBER, and authors computations
