Unexpectedly Intriguing!
September 10, 2007

Not long ago, one of our readers pointed our attention to a recent paper from the San Francisco branch of the Federal Reserve by Glenn D. Rudebusch and John C. Williams, who found that the U.S. Treasury yield curve was, by far, a better predictor of recessions in the U.S. than professional economic forecasters.

Since the recent volatility in the markets combined with the extreme doom and gloom of several of these professional economic forecasters has sparked some additional interest in whether or not the U.S. economy will go into recession anytime soon, it seemed to be a good time to revisit our tools for forecasting recessions, which are based on a model developed by the Federal Reserve's Jonathan Wright, and which combine U.S. Treasury yield curve data with the level of the Federal Funds Rate set by the Fed, and develop a new ongoing feature here at Political Calculations.

Over the weekend, we unveiled that new ongoing feature! The Recession Probability Track will be updated weekly and will appear in the right hand margin of the site. The first chart covers the period from 8 September 2003 through last Friday, 7 September 2007:

Recession Probability Track, 8 September 2003 through 7 September 2007

The chart highlights the most recent 12-month recession probability peak of 50.0% that was reached on 4 April 2007. Since then, the probability that the U.S. will be in recession has receded to a value of 29.0% on last Friday, 7 September 2007.

For the sake of historical context, the following chart illustrates the track the probability of recession took in the four years prior to the current four year-long chart, spanning from 7 September 1999 through 5 September 2003:

Recession Probability Track, 7 September 1999 through 5 September 2003

This chart gives an indication of the predictive power of the recession prediction model developed by Jonathan Wright, who developed the math behind our recession predicting tool. Here, we see that the probability of recession occurring in the next 12 months first exceeded the 50% level on 9 August 2000, before peaking at a level of 71.8% on 3 January 2001, and dropping back below the 50% level on 13 March 2001.

The National Bureau of Economic Research determined the corresponding recession began in March 2001 (7 months after Wright's method forecast) and ended in November 2001 (8 months after Wright's method dropped below the 50% probability level).

Labels:

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.