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Discussion Paper
How Uncertain Is the Estimated Probability of a Future Recession?
Since World War II, the U.S. economy has experienced twelve recessions—one every sixty-four months, on average. Though infrequent, these contractions can cause considerable pain and disruption, with the unemployment rate rising by at least 2.5 percentage points in each of the past four recessions. Given the consequences of an economic downturn, businesses and households are perennially interested in the near-term probability of a recession. In this post, we describe our research on a related issue: how much uncertainty is there around recession probability estimates from economic models?
Report
What predicts U.S. recessions?
We reassess the predictability of U.S. recessions at horizons from three months to two years ahead for a large number of previously proposed leading-indicator variables. We employ an efficient probit estimator for partially missing data and assess relative model performance based on the receiver operating characteristic (ROC) curve. While the Treasury term spread has the highest predictive power at horizons four to six quarters ahead, adding lagged observations of the term spread significantly improves the predictability of recessions at shorter horizons. Moreover, balances in broker-dealer ...