In a lot of ways, using the inversion of the U.S. Treasury yield curve to forecast recessions has become a lot like the old folk tale of the shepherd boy who cried wolf.

The curve itself first inverted when the yield of the 3-month Constant Maturity U.S. Treasury first rose above the level of the 10-year Constant Maturity U.S. Treasury in October 2022. Since then, predictions that recession would follow have been frequently made without any official declaration by the National Bureau of Economic Research to that effect in the months since. Whenever it makes that determination, the NBER will identify the month in which economic expansion in the U.S. peaked before beginning to contract, which will be Month 0 of that newly declared recession. After that, we'll have to wait longer for them to get around to determining when it ended.

We've been tracking a recession forecast model developed for the Federal Reserve Board by Jonathan Wright in 2006, which utilizes the U.S. Treasury yield curve as an input, while also factoring in the level of the Federal Fund Rate. That model first projected a greater-than-50% probability of recession being officially determined to have begun sometime between March 2023 and March 2024. In the following months, the model's recession forecast went on to rise above an 80% probability, which would apply for the months between July 2023 and July 2024.

Since then, the model's calculated probability of recession has retreated but still remains elevated. As the following chart tracking the history of the Wright model's recession forecast shows, it has recorded a double-top and has been hovering around the 70% threshold for several months. Please note the chart is time-shifted forward by twelve months to show the indicated recession probability at the end of the forecast period to which it applies.

In recent weeks, the spread between 10-year and 3-month constant maturity U.S. Treasuries has been rising, which points to the likelihood the downward trend in the recession probability's trajectory may soon reverse. If that happens, we could see a triple-top pattern form with the forecast recession probability continuing to hover near 70%. We had considered the possibility of a triple-top to be unlikely in our previous update six weeks ago.

With the Federal Reserve increasingly expected to delay any changes in the Federal Funds Rate until later in 2024, the latest update Recession Probability Track shows the recession probability hovering between 67% and 77% while the Federal Funds Rate has been held at an average of 5.33%.

As for what else these charts show, the probability of recession peaked at nearly 81% on 25 July 2023, making the period from July 2023 through July 2024 the mostly likely period in which the National Bureau of Economic Research will someday identify a point of time marking the peak in the U.S. business cycle before it entered a period of contraction. The prolonged elevation of the Federal Funds Rate combined the deepened inversion of the U.S. Treasury yield curve in recent weeks has made the period between 18 March 2024 and 18 March 2025 the second most-likely period that will include the peak of a business cycle that marks when a recession began.

The double-top pattern however can be considered to extend the period in which the highest probabilities of recession applies. Under that interpretation, the period in which the probability of an official recession starting would be greater than 70% is running from 25 July 2023 through at least 10 June 2025.

Analyst's Notes

The Recession Probability Track is based on Jonathan Wright'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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