The Federal Reserve Chance of Recession Chart
A few days ago I linked to a chart from the Federal Reserve Bank of St. Louis that attempts to forecast recessions. The post I linked to asserted that the chart now indicates we have a 100% chance of a recession based on how the chart today compares with past performance. But it turns out the picture isn’t that clear. The economists who developed the chart and wrote an article about it don’t have the same interpretation. Instead, they say the index they constructed needs to be around its current level for at least three months before it can be said to be forecasting a recession. You can read a more detailed explanation of the chart here.
Both authors of the cited paper have confirmed (via email) the interpretation I explained in this post. With permission of Prof. Chauvet, I am quoting her email to me:
“Real time probabilities are very noisy, and a little bump of 15%, 20% or even 30% does not mean much in terms of signaling recessions.
Please check the graph on real time probabilities of recession on my site:
These are the probabilities we get on a month-to-month basis, without data revisions, and without smoothing. As you can see, the probabilities can even be above 50% and a recession does not follow. This is why in my paper with Jeremy we set the rule that the probability would have to be above 80% and for a couple of months before one could call a recession.”
