Political Calculations

U.S. Recession Probability Drops Below 20%

An editorial cartoon of a Federal Reserve official looking into a crystal ball that says 'RECESSION? ASK AGAIN LATER'. Image generated by Microsoft Copilot Designer

The probability that the National Bureau of Economic Research will someday determine a national recession began in the U.S. between December 2025 and December 2026 has fallen below twenty percent.

That is the lowest probability returned by a recession forecasting method that we've been following since December 2022, which we started tracking after the U.S. Treasury yield curve inverted in October 2022. This method was developed by Jonathan Wright while working for the Federal Reserve Board back in 2006. It incorporates the one-quarter averages of the spread between the 10-Year and 3-Month constant maturity U.S. Treasuries and the level of the Federal Funds Rate to anticipate, within a 12-month period from an observation date, what the probability the U.S. economy will be in a period of contraction according to criteria used by the NBER.

The reason we're following it is because it often takes the NBER months to get around to making that determination after a recession has started. And since a yield curve inversion, when the yield of a 3-Month Treasury is higher than the yield of 10-Year Treasury, is often a harbinger of recession, using a recession forecasting method built using historic data that incorporates it can be useful.

The current recession probability level has been achieved following the two reductions in the Federal Funds Rate the Fed has made in the last three months. These cuts have lowered this base interest rate to a target range of 3.75-4.00%. Investors expect the Fed will act again on Wednesday, 10 December 2025 to lower it by another quarter percent to a target range of 3.50-3.75%, the lowest it has been since October 2022.

The following update to the Recession Probability Track shows how the probability of recession has evolved from 20 January 2021 through 8 December 2025 in the context of how the difference between the yields of the 10-year and 3-month U.S. Treasuries combined with the level of the Federal Funds Rate have changed over this time.

Recession Probability, 20 January 2021 through 8 December 2025

Because Wright's method looks to see whether any of the next twelve months into the future will contain a month the NBER will determine marks the peak of a business cycle, or rather Month 0 of a period of economic contraction, having the latest recession probability falling below the 20% threshold doesn't mean the U.S. economy is out of the woods. We've summarized what periods Wright's method has indicated since we've been tracking it for this series is most likely to include that Month 0:

50% Probability of Recession

13 February 2023 through 29 November 2025

60% Probability of Recession

25 April 2023 through 29 October 2025

70% Probability of Recession

25 May 2023 through 8 October 2024
31 January 2024 through 29 March 2025
5 September 2024 through 20 September 2025

These are the periods the recession forecasting method predicts the National Bureau of Economic Research will someday identify as containing the month in which a period of economic contraction began. The three sets of dates that apply for a 70% or greater probability of recession relate to a "triple-top" series of peaks the model has recorded since mid-2023.

The end of the first period at this greatly elevated recession probability coincides with when the U.S. Federal Reserve initiated a new series of interest rate cuts that took place between September and December 2024 to forestall a recession from starting in the U.S. during the 2024 election season.

The first two periods coincide with a period of anemic job growth in the U.S. economy, which is confirmed by Bureau of Labor Statistics data that has undergone two massive downward revisions, confirming the labor market was far weaker than initially reported.

The third period coincides with the timing for when the Federal Reserve resumed cutting U.S. interest rates to address a slowing economy in September 2025.

The most important thing to take away from this retrospective analysis is that the recession model's forecasts for these elevated recession probabilities were set more than a year ago. Today's economic weakness has been baked in for a very long time.

Analyst's Notes

This is the end of the road for our series! Both our criteria for terminating the series have now been met: the U.S. Treasury yield curve has not been inverted since September 2025 and the recession probability threshold finally dropped below 20% this month. If you still want to follow recession probability estimates, there are alternate estimates based on different methods that will give you a current estimate.

The recession probability we've presented is based on the Federal Reserve Board's yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you'd like to do that math using the latest data available to anticipate where the Recession Probability Track is heading, we have provided a tool to make it easy to do.

For the latest updates of the U.S. Recession Probability Track, follow this link!

Previously on Political Calculations

We started this new recession watch series on 18 October 2022, coinciding with the inversion of the 10-Year and 3-Month constant maturity U.S. Treasuries. Here are all the posts-to-date on that topic in reverse chronological order, including this one....

Image Credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Federal Reserve official looking into a crystal ball that says 'RECESSION? ASK AGAIN LATER'".

Labels: recession forecast

- posted by Ironman at 5:02 AM | Permalink | Home |

U.S. Recession Probability Falls After Fed Resumes Rate Cuts, Set to Fall Further

An editorial cartoon of Federal Reserve officials meeting with a carnival fortune teller as they decide how to change interest rates. Image generated by Microsoft Copilot Designer

After pausing for nine months, the U.S. Federal Reserve resumed cutting interest rates on 17 September 2025. The Fed reduced the Federal Funds Rate by a quarter percent to a target range of 4.00-4.25%.

As expected, this action reduced the probability a recession will begin in the next twelve months. The recession forecasting method we've used to monitor the odds of recession starting in the U.S. indicates the recession probability has dipped from 26.5% six weeks ago to 23.7% as the Fed appears set to reduce U.S. interest rates further.

We anticipate that action will continue pushing the odds of a U.S. recession starting in the next twelve months down slowly because of the expected small size of its imminent rate cut. We project that in the next six weeks, the probability of a U.S. recession getting started in the next twelve months will be around 21%.

Then, assuming the Fed acts again in six weeks to cut U.S. interest rates by another quarter point, as is currently expected by the CME Group's FedWatch Tool, we should see the recession probability drop below the key 20% threshold in early 2026.

The following update to the Recession Probability Track shows how the probability of recession has evolved from 20 January 2021 through 15 September 2025 in the context of how the difference between the yields of the 10-year and 3-month U.S. Treasuries combined with the level of the Federal Funds Rate have changed over this time.

Recession Probability, 20 January 2021 through 17 October 2025

A 20% probability represents the "background" probability of recession for the U.S. economy. By this, we mean that if you packed a bag a marbles identified with every month and year the United States has been an independent nation and picked one at random, you would have a 20% chance of picking a marble with a date the U.S. economy was in recession. We plan to end this series after the probability of recession drops below this probability threshold.

However, that doesn't mean the U.S. economy is not experiencing recessionary conditions today, for which there are some indications of distress:

It often seems that economists are perpetually warning us about the next U.S. recession. One influential analyst says an economic slowdown is already a fact of life for many Americans.

Twenty-two states are “now experiencing persistent economic weakness and job losses that are likely to continue," said Mark Zandi, the chief economist at Moody’s Analytics, to MarketWatch. The overall American economy is “on the precipice. Government data released before the shutdown showed the “broader economy was in pretty good shape,” said MarketWatch, but some are skeptical. The gross domestic product might be rising, said Zandi, but the “job market is weaker.”

Other observers are warning of a bifurcated “K-shaped economy,” said CNBC. Wealthy Americans are “engaging their purchasing power,” but lower- and middle-class consumers are struggling with “rising costs on daily essentials like groceries and gas.” Meanwhile, “unofficial signals” like rises in missed car payments and women leaving the workforce are offering “early warning signs about what is to come,” said Quartz.

These conditions haven't developed in a vacuum. The onset of these conditions have coincided with elevated probabilities of recession that the recession forecasting model we track was projecting more than a year ago. Here's a short summary of when the model anticipated those conditions could develop into a higher likelihood of recession.