There's been some confusion in a number of forums regarding our Recession Probability Track and what the probabilities it indicates really mean. Here's the inside scoop:
- Political Calculations' Recession Probability Track is based upon a recession prediction model developed by Jonathan Wright of the Federal Reserve Board. Our tool Reckoning the Odds of Recession, is based upon that model (details and links to the original source material are available in our post with the tool.)
- To calculate the probabilities graphically presented in the Recession Probability Track, we follow Wright's method of averaging the daily effective closing Federal Funds Rate and the spread between the 10-Year and 3-Month Constant Maturity Treasuries over a one-quarter period of time. The Recession Probability Track visualizes this probability over the four year period preceding the most recent calculated probability to illustrate trends over this time.
- Wright's method is designed to anticipate recessions roughly one-year ahead of when the NBER will find that one has occurred. That means our most recent data is now looking ahead to March 2009 (see chart below):
- The probability of recession determined by this method that is most relevant to us today is the peak of 50% that occurred on 4 April 2007. That means that a year from right now is the period that the NBER is most likely to find to be in recession, should they make such a finding.
Finally, at this point, it appears that Wright's recession prediction model has worked pretty well as an early warning system. We'll keep updating it weekly if you promise to keep coming back to see where we're at!
Labels: recession forecast
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