With all the talk of a "soft landing" for the U.S. economy in the media in recent weeks, we half-expected to find the odds of a recession for the U.S. economy had continued to recede over the past six weeks.

But that's not what has happened. Instead, we find the probability of recession has resurged since our previous report. After bottoming at 67% in the period from mid-November to mid-December 2023, the odds of recession have increased to over 74% as of 29 January 2024.

The change reverses what had been a declining trend in the probability of recession that had begun after it peaked at nearly 81% on 25 July 2023.

The change is not entirely unexpected as we had anticipated the recession odds could see such a reversal in our previous update. The cause of the change is a deeper inversion of the U.S. Treasury yield curve over the last six weeks, where the yield of the constant maturity 10-year U.S. Treasury has fallen as the 3-month U.S. Treasury has held relatively steady.

Here is the newest update to the Recession Probability Track illustrating how things stand going into the Federal Reserve's Federal Open Market Committee's first two-day meeting of 2024. The committee is expected to hold the Federal Funds Rate steady at this meeting, but is also expected to start lowering this core interest rate at later meetings in 2024. What the Fed plans to do with interest rates will have a lot to do with how the U.S. economic situation develops this year:

The Recession Probability Track indicates the probability a recession will someday be officially determined to have begun sometime in the next 12 months. For this update, that applies to the dates between 29 January 2024 and 29 January 2025.

Even with the recent resurgence, the probability of recession peaked at nearly 81% on 25 July 2023, which makes 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.
 

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 to follow 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.

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