Recession Probability has significant resurgence chances to over 70%
With the recent media focus on a potential "soft landing" for the U.S. economy, we had expected to find that the odds of a recession had continued to decline over the past six weeks. However, this has not been the case. Instead, we find that the probability of recession has increased since our previous report.
After bottoming out at 67% in the period from mid-November to mid-December 2023, the odds of a recession have now increased to over 74% as of January 29, 2024. This reversal of the declining trend in recession odds that had begun after peaking at nearly 81% on July 25, 2023, was not entirely unexpected. As we noted in our previous update, a deeper inversion of the U.S. Treasury yield curve could cause the recession odds to increase.
The latest update to the Recession Probability Track shows that the yield of the constant maturity 10-year U.S. Treasury has fallen further relative to the 3-month U.S. Treasury over the past six weeks. This deepening inversion of the yield curve is a sign that the market is increasingly concerned about the possibility of a recession.
The Federal Reserve's Federal Open Market Committee is scheduled to hold its first two-day meeting of 2024 on January 25-26. The committee is widely expected to hold the Federal Funds Rate steady at this meeting, but is also expected to begin lowering this core interest rate at later meetings in 2024. How the Fed plans to manage interest rates will have a significant impact on the U.S. economic outlook this year.
Recession Probability Track
The Recession Probability Track indicates the probability that a recession will be officially declared to have begun sometime in the next 12 months. For this update, that applies to the dates between January 29, 2024, and January 29, 2025.
Even with the recent increase in recession risk, the probability of recession peaked at nearly 81% on July 25, 2023. This makes the period from July 2023 through July 2024 the most likely period in which the National Bureau of Economic Research will identify a point in time marking the peak of the U.S. business cycle before it entered a period of contraction.
Analyst's Notes
The Recession Probability Track is based on Jonathan Wright's yield curve-based recession forecasting model. The model 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 would like to do the math yourself using the latest data available to anticipate where the Recession Probability Track is headed, we have provided a tool to make it easy.
We will continue to follow the Federal Reserve's Open Market Committee meeting schedule in providing updates for the Recession Probability Track until the U.S. Treasury yield curve is no longer inverted and the future recession odds retreat below a 20% threshold.