The probability model for a recession from the Federal Reserve has been steadily increasing and has now reached its highest point since 1982.
The National Bureau of Economic Research (NBER) is known for its slow process of identifying business cycle changes, often lagging behind by months as they consider various data series and wait for revisions. As a result, experts have created models to foretell when these shifts will occur, including when recessions would start. Jonathan Wright developed one of these models while he was employed by the Federal Reserve Board.
This modal uses three data series:
(b) The 10-Year U.S. Treasury yield
(c) The 3-Month Treasury yield.
When the latter drops below the former, indicating an inverted yield curve, Wright’s model signals a red warning for an impending recession. As of April 27, 2023, the model predicts a 67.0% chance of a recession being officially declared between that date and April 2024.
According to the chart, there is a 67.0% chance of an official determination that a recession has begun between April 27, 2023 and April 27, 2024. If the Federal Reserve increases the Federal Funds Rate by 0.25% next week as planned, the probability of a recession will continue to rise. Using a recession odds reckoning tool and current data on the inverted 10-Year and 3-Month Treasuries, it is estimated that the odds of a recession will exceed 70% in about two weeks. Even if the Federal Reserve stops raising the Federal Funds Rate after next week’s meeting, it is predicted that the odds of a recession will surpass 80% in early July 2023.
Another Probability Model Suggests a 99% Chance of Recession
As per The Conference board probability model, there is a near-99 percent likelihood of a recession occurring in the US within the next 12 months. The economic weakness will intensify and spread more broadly throughout the US economy in the coming months, resulting in a recession starting in mid-2023. Despite better-than-expected consumer spending recently, the Federal Reserve’s interest rate hikes and monetary policy tightening will result in GDP contraction for three consecutive quarters beginning in Q2 2023. Although US GDP growth defied expectations in late 2022 and early 2023, their forecast remains unchanged.
After the initial phase of the global pandemic, the probability of a recession was close to zero from September 2020 to March 2022, but it rose to over 30 percent in April and 50 percent in May. This indicates that the US economy is likely to enter a recession within a year from that point onward, and the probability has remained elevated since then.