Third time's the charm?

That's a question we're asking because for all intents and purposes, the method we've used to track the probability of recession in the U.S. since the U.S. Treasury yield curve first inverted in October 2022 is about to do something it hasn't done before. It's going to record a "triple-top".

In a sense, that's good news, at least if you're a fan of technical analysis in evaluating patterns in stock prices. As predictive methods go, we've previously found technical analysis can produce results that are not much different from what you might get by going to your local psychic for a reading of your tea leaves.

Which is to say that maybe you'll be one of the lucky few who get a reading that portends something that's somewhat plausible. In this case, that would be because a triple top signals the third, last bump upward in the pattern for the probability of recession will be the last, with the probability set to fall decisively from this lofty level.

If you go by the following chart, that triple top is still forming. The third peak hasn't yet been set.

But it is increasingly likely that once it does, it will represent the third and last peak above the 70% recession probability level.

That's because the inversion of the U.S. Treasury yield curve is unwinding. In the past week, the yield of the 2-year Treasury dropped below the level of the 30-year.

With the Federal Reserve on track to start cutting shorter term interest rates, the "reversion" of the Treasury yield curve will gain speed in the months ahead. That will impact the spread between the 3-month and 10-Year Treasuries that provides key data points in the recession forecasting method we've been following. That spread is currently negative and will, with the Fed's action to cut rates, most likely move to become less negative and then positive. The effects of which reduce the method's forecast probability of recession in the 12 months ahead.

You can see how that might apply in the latest update of the Recession Probability Track.

Now over 70% again, the chart is signaling there will be an elevated probability of recession covering the period from July 2024 through July 2025. This span of time marks the most likely period in which the National Bureau of Economic Research will, someday, identify a month that marks the peak of a period of economic expansion in the United States, after which, the U.S. economy will have entered into recession.

Sound vague enough to be akin to what you might hear about your future from a psychic?

In any case, we'll check in on how things develop in another six weeks, which will coincide with the Fed meeting that most economists and analysts believe will mark the first of a series of rate cuts in the weeks and months ahead.

If you think about it, that says a lot about what the members of the Fed think. Because why would the Fed need to cut interest rates if the U.S. economy is genuinely healthy? And we are, after all, simply presenting the results of a recession forecasting method that was specifically created for them. These are the tea leaves they are reading.

Analyst's Notes

The Recession Probability Track is based on the Federal Reserve Board's yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you'd like to do that math using the latest data available to anticipate where the Recession Probability Track is heading, we have provided a tool to make it easy to do.

We will continue following the Federal Reserve's Open Market Committee's meeting schedule in providing updates for the Recession Probability Track until the U.S. Treasury yield curve is no longer inverted and the future recession odds retreat below a 20% threshold. We're curious to see how this forecasting method performs.

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