In 2019, Fed financial expert David Miller carried out a thorough assessment of term spread predictive power for recessions (There is No Single Best Predictor of Economic Crises). For the 1984-2018 period, he found the following:
Figure 2: AUROC Sample 1984– 2018 from Miller (2019 ).
For a discussion of AUROC (Area Under Receiver Operating Characteristics curve), see this post by Jim H.
What do these spreads look like since Friday?
Figure 1: 1yr-Fed funds spread (chartreuse), 5yr-Fed funds (red), 10yr-Fed funds (vibrant teal), 10yr-1yr (sky blue), and 3yr-2yr (purple), all in %. Red dashed line at broadened Russian intrusion of Ukraine. Source: Treasury by means of FRED, and authors estimations.
The 1yr-Fed funds spread (1-2 month horizon) has actually not gone negative, nor has the 5yr-Fed funds spread (4-9 months) although its come close. The 10yr-Fed funds spread (10-19 months) did end unfavorable on November 10th, which would suggest that somewhere in between September 2023 and August 2024 an economic downturn would occur. The 10yr-1yr has likewise signed up unfavorable on July 12th, so in between 20 and 23 months ahead (February to May 2024).
Here by the method are the typical spreads I show:
.
Figure 2: 10yr-Fed funds (teal), 10yr-3mo (blue), and 10yr-2yr (dark red), all in %. Red dashed line at broadened Russian intrusion of Ukraine. Source: Treasury by means of FRED, and authors estimations.
Note that the AUROCs were determined for basic term spreads, and not models integrating other variables like foreign term speads, financial conditions indices or stock costs (as discussed in this post)
Figure 1: 1yr-Fed funds spread out (chartreuse), 5yr-Fed funds (red), 10yr-Fed funds (bold teal), 10yr-1yr (sky blue), and 3yr-2yr (purple), all in %. The 1yr-Fed funds spread (1-2 month horizon) has actually not gone negative, nor has the 5yr-Fed funds spread (4-9 months) although its come close. The 10yr-Fed funds spread out (10-19 months) did end unfavorable on November 10th, which would suggest that someplace in between September 2023 and August 2024 a recession would happen.
.
