As the year progresses, the speculation surrounding the possibility of being in a recession continues to stir up discussions among analysts. While some voices in the minority have been adamant about their beliefs, it remains to be seen how their views will evolve in light of new data. There are three potential scenarios that could align with the notion of an impending recession: the model is flawed, the recession is already underway without our knowledge, or the recession is looming on the horizon.
Here are the predictions generated by a probit model based on a standard term spread alongside a short rate model, analyzed over two different time frames. The first span covers from 1986 to October 2023, assuming no recession occurred as of October 2024, while the second span excludes the pandemic-induced recession in 2020.
- The estimated probability of a recession 12 months from now, using the complete dataset, indicates a 79% chance of a recession in January 2025.
- Utilizing data up to 2018, before the pandemic, yields a 50% probability.
- However, a more comprehensive model that integrates foreign term spreads and debt-service ratios outperforms the basic specifications.
- Combining the term spread, short rate, and debt-service ratio produces a higher pseudo-R2 of 0.56, indicating greater predictive power.
The statistical analyses also unveil contrasting results between pre-pandemic and full sample estimates, highlighting the importance of external factors in forecasting economic downturns. Incorporating a foreign term spread increases the probability of a recession in January 2025 to 23%, a notable jump from previous estimations.
The market’s current outlook, based on the DSR-augmented model, suggests a potential recession is not on the imminent horizon. However, unforeseen events in the coming months could disrupt these projections significantly, shifting expectations drastically.
In a recent update at 5 pm CT, alternative sources such as Kalshi provide insights from betting markets on the likelihood of consecutive negative GDP growth quarters in 2025, aligning with the NBER BCDC criteria for payout determination. It remains essential to monitor these evolving trends and predictions to navigate the economic landscape effectively.
