Carpe Diem

Chart of the day: US recession probability is only 1/5 of 1%

piger

The chart above shows University of Oregon economics professor Jeremy Piger’s “Recession Probability Index” from January 1968 to December 2012, based on the four monthly variables used by the NBER to determine US recessions: 1) non-farm payroll employment, 2) the index of industrial production, 3) real personal income excluding transfer payments, and 4) real manufacturing and trade sales.

According to Professor Piger, “Historically, three consecutive months of recession probabilities exceeding 0.8 has been a good indicator that an expansion phase has ended and a new recession phase has begun, while three consecutive months of recession probabilities below 0.2 has been a good indicator that a recession phase has ended and a new expansion phase has begun.” For more details on the methodology used to calculate the recession probabilities, see Professor Piger’s research article (co-authored with Marcelle Chauvet) here. Notice that Piger’s recession probability index accurately captured the periods of the last seven US recessions, even though the probabilities during the 1990-1991 and 2001 recessions didn’t rise to the 0.8 threshold mentioned by Professor Piger above. Every recession, though, was characterized by rising probabilities during the initial months of the recession, with recession probabilities exceeding double-digits in the early months of the recession, and then rising above 40% or higher at the peak of the last seven recessions — and that certainly doesn’t describe the current situation.

Based on today’s update, the Recession Probability Index was 0.20% in December (probability of only 1/5 of 1% or 1 in 500 chance), following a downward revision in November from 0.20% to 0.00%. For more than three years starting in August of 2009, the Recession Probability Index has been below 1% for the last 41 months, with the exception of August 2012 (1.2%). Based on this historically accurate measure of the probability of a US recession, the “plowhorse” American economy, while still in a sub-par recovery, is not even close to being in the early stages of an economic contraction or double-dip recession (as of December 2012).

5 thoughts on “Chart of the day: US recession probability is only 1/5 of 1%

  1. is it just me, or does this:

    “Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion.”

    mean that this metric completely missed the 2001 and 1992 recessions and did not warn you about 2008 until you were 6 months into it?

    using that as a recession predictor seems like using air bags to tell if you are going to hit somehting when they only work 1 time in 3.

  2. Sometimes employment gains are maintained before a recession begins,so that might not be a good indicator here.Also looking at this chart I foregot just how severe the early 1980-82 double dip recession was,maybe because I was a kid then it didn’t phase me.This Great Recession was a real butt kicker though.

  3. Hmm. So according to the chart, with the blue lines and the shaded areas, it appears that the probability of a recession goes up during a recession.

    Interesting.

  4. All the leading indicators are overtly positive:

    PMI at 54.2, the highest reading since 2011. Additionally, all the components of the PMI are overtly positive. Also, of the 18 industries in the PMI, 15 of them are expanding, indicating this is a wide spread expansion, rather than just limited to a few key industries.

    USLI is rising.

    Retail Sales (excluding autos, adjusted for inflation) are at record levels and growing at the fastest pace since August 2007 (annual basis).

    Nondefense Capital Goods New Orders (excluding Aircraft), while below year-ago levels, do have signs of positive momentum building.

    The Chicago Fed National Activity Index 3MMA is at 0.3, indicating the economy is growing at about it’s historical pace.

    Housing is growing.

    Automobile Production is at 15.5 million units (annual basis), the highest level since Sept 2006.

    Given the timing relationship of these leading indicator’s rates-of-change to US Industrial Production (the benchmark for the US economy), this suggests no US recession in the first three quarters of 2013.

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