U.S. Recession Odds Peak, Begin To Recede

Based on recent changes in the trends for the U.S. Treasury yield curve and the level of the Federal Funds Rate, the probability the national U.S. economy will enter into recession sometime in the next twelve months appears to have peaked during the last month and has begun to recede.

That's tough to tell from the Recession Probability Track, which still shows an 11% probability the U.S. economy will enter into recession between 9 October 2019 and 9 October 2020, but that's due to our rounding the probability to the nearest whole percentage point. When we round the recession odds to one decimal point, we find the percentage probability peaked at 11.3% just before our last update three weeks ago, which has since declined to 10.5% as of 9 October 2019.

U.S. Recession Probability Track Starting 2 January 2014, Ending 9 October 2019

 

That's primarily due to the effect of the Fed's two quarter point reductions of the Federal Funds Rate since 31 July 2019, which is starting to have an effect on the recession odds that may be determined using the methodology laid out by the Federal Reserve Board's Jonathan Wright in a 2006 paper.

Meanwhile, in the last several days, the Federal Reserve has all but thrown in the towel for resisting further interest rate cuts and has launched a new program of quantitative easing to buy large quantities of U.S. Treasury securities and mortgage-backed securities from government-supported enterprises like Fannie Mae and Freddie Mac to stimulate the economy, just like it did during the Great Recession, although Fed Chair Jerome Powell is working overtime to keep from calling it "QE". Perhaps the funniest thing we've read in some time on the topic of the Federal Reserve's monetary policies is Mark Orsley's article "First Rule of QE Club, Don't Call It QE" over at ZeroHedge - looks like Tyler Durden has a new catchphrase!

One important thing to remember at this point is what Wright's methodology is forecasting - the probability that the National Bureau of Economic Research will someday declare that a recession began sometime in the twelve-month period from 9 October 2019 to 9 October 2020. Should the NBER ever make such a declaration, it could come as early as sometime in late 2020, or it could come sometime in 2021. To provide a frame of reference, in late March 2007, Wright's method forecast a peak 50% probability the NBER would someday declare the U.S. would enter recession sometime between April 2007 and April 2008. The NBER didn't make a public declaration of recession until December 2008, when they announced what would become known as the Great Recession had begun after the U.S. economy peaked in December 2007.

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