Chart of the Month: The Probability of a Recession in the Next 12 Months is Rising
Source: Federal Reserve Bank of New York, NBER
Fed officials are closely monitoring the health of the U.S. economy, as trade uncertainty, low inflation, and slower global growth are threatening to derail the current expansion. While U.S. growth has been remarkably resilient amid these global headwinds, recent manufacturing surveys and business investment suggest that the rising uncertainty is starting to have a dampening effect on U.S. economic activity. Of note, a probability model used by the N.Y. Fed to calculate the odds of a recession in the next 12 months has risen substantially in recent months. At the end of August, the N.Y. Fed’s model predicted a 37% chance of a recession – its highest reading since the start of the Great Recession in 2007. This would be the third consecutive month the model placed the recession probability above 30%, a level that has historically preceded all prior recessions dating back to the 1960’s – with one exception. The only false signal predicted by the model occurred in the late 1960’s, a period similar to today’s economic environment with low inflation and low unemployment. While the probability of a recession is alarming, the Fed (and other Central Banks around the world) are taking steps to prevent the current economic slowdown from turning into a full-fledged recession. However, with the model’s strong track record for predicting recessions, it is hard to ignore the rising risks.
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