Image Source: PixabayProbabilities have peaked, using a standard spread model.Here is an updated assessment of recession probabilities (for 12 months ahead), including data through June 2024, and assuming no recession has arrived as of July 2024.
Figure 1: Probit estimated recession probabilities for 12 months ahead, using 10yr-3mo spread and 3 month rate (blue), 10yr-3mo spread, 3 mo rate, and debt-service-ratio for private nonfinancial sector (tan), and 10yr-3mo spread, 3 mo rate, debt-service-ratio for private nonfinancial sector, and foreign term spread (green). Sample for estimation 1985M03-2024M06. NBER defined peak-to-trough recession dates shaded gray. Source: Author’s calculations, and NBER.The pseudo-R2 for the debt-service ratio augmented specification, and that including the foreign term spread as well as debt-service ratio, are 0.56 vs. 0.58.The forecasted probabilities for July 2024 range from 60% (term spread, short rate) to 20% (term spread, short rate, debt-service ratio).The declining probabilities for the debt-service augmented models rely on the declining pace of increase, which I’ve extrapolated dynamically for the first six months of 2024.
Figure 2: Debt-service ratios for nonfinancial private sector (black), dynamically forecasted (tan), both in %. 2024Q1-Q2 is estimated using interest rates (see here). NBER defined peak-to-trough recession dates shaded gray. Source: BIS, Dora Fan Xia, NBER, and author’s calculations.More By This Author:China GDP News, And A View On Chinese Medicine Four Measures Of Consumer Prices For June (And Two For May) CEA: “Tariffs As A Major Revenue Source: Implications For Distribution And Growth”
