Tuesday, January 05, 2016

Recession Watch: Chauvet-Piger and Term Spread Probabilities January 2015

For forecasting oncoming recession, from a purely statistical standpoint, we have two interesting data series to follow, the Chauvet-Piger Recession Probabilities and the Term Spread Probability of Recession

In the latest release of the Chauvet-Piger Recession Probability indicates that the probability of recession has increased to 0.78% currently indicating minimal risk of looming recession.

In 2008, Marcelle Chauvet of the University of California and Jeremy Piger of the University of Oregon published a paper titled “A Comparison of the Real-Time Performance of Business Cycle Dating Methods” which outlined two novel statistical methods (most notably the markov-switching method) for distilling recessionary turning points out of the very same macro data series that the NBER uses to make it’s cycle assessments.

As for the Term-Spread Probability of Recession, the latest data indicates that the probability for recession appears to be on the rise with late 2016 probability (the probability that there will be a recession by that date) of 3.56%.

Spearheaded by economist Professor Arturo Estrella of the Rensselaer Polytechnic Institute, this method derives a probability of recession from the spread between long and short yields (10-year and 3-month) and is by all accounts the standard for recession probability forecasting.

Keep in mind that a positive indication using this method would require this probability to reach 30% so while the probability is clearly rising, the current probability is still quite low.