As whispers of an impending recession grow louder, the financial landscape seems poised for uncertainty. Headlines scream warnings from Wall Street banks and market analysts alike, painting a bleak picture of the future. The numbers tell a similar story, with Kalshi’s recession probability for 2025 skyrocketing to 42%, a significant jump from its previous 22% mark. In the midst of this turmoil, one question looms large: what do the indicators say about the potential recession in 2025?
- The Significance of Term Spread Model: Figure 1 showcases the probability of a recession 12 months ahead based on the conventional term spread (10yr-3mo) model. This model has long been used as a benchmark for predicting economic downturns, with shaded gray areas representing recession dates as defined by NBER. The data from last March points to a staggering 44% probability of a recession.
- Incorporating Debt-Service Ratio: A more refined model, as proposed by Ferrara and Chinn (2024), takes into account not only the term spread but also the private nonfinancial debt-service ratio. This comprehensive approach, which also considers foreign term spread data as per Ahmed and Chinn (2024), has shown promise in predicting recessions since 1990, excluding the anomaly of the 2020 recession. According to this model, the probability of a recession in March sits at 35%, edging up to 38% by August.
In the face of looming economic uncertainty, it becomes essential to heed the warnings of these indicators. While the numbers may paint a bleak picture, they also provide insight and foresight into potential economic pitfalls. As the financial world braces itself for what lies ahead, it is crucial to stay informed and prepared for whatever the future may hold.
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