Last month, I posted the NY Fed’s “Chance of Recession” spread. It’s a fun little chart that shows the chance that our economy will be in recession in the next 12 months. It’s SUPER fun now because the value is about as low as it’s ever been; 00.041%.
TJIC called shenanigans:
So you think that the chance of a recession is 200:1 against?
Tell you what, I’ll offer you great odds – 100:1 (that’s twice what the data suggests).
So, I have gone back and done some further analysis on the numbers and have come back with a better approximation of the “Chance of Recession”.
I continue to the “Chance of Recession” as it really is a rating of some interest rate spreads. However, I have added 4 measures:
- A rolling 6 month average
- A rolling 3 month average
- A 10 month climbing trend
- a 4 month climbing trend
Using these four values, I am able to get pretty close, and certainly better, at predicting an upcoming recession.
Without going into too much detail, it roughly comes down to this:
The posted “Chance of Recession” usually has to be above 20-25% for consecutive months. So, in essence, we can multiple the posted “chance” by 4.5 and get a reasonably good value.