NY Fed Treasury Spread Model: Economic Recovery Underway, NO Chance of a Double-Dip Recession

The New York Fed recently released its latest “Probability of U.S. Recession Predicted by Treasury Spread,” with data through October 2009, and the Fed’s recession probability forecast through October 2010 (see top chart above). The NY Fed’s model uses the spread between 10-year and 3-month Treasury rates (3.32% spread in October) to calculate the probability of a recession in the U.S. twelve months ahead.

The Fed’s model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For October 2009, the recession probability is only 0.18% (less than 1/5 of 1%) and by a year from now in October 2010 the recession probability is only .105%, or about 1/10 of one percent.

Further, the Treasury spread has been above 3% for the last six months (since May), a pattern consistent with the economic recoveries following the last two recessions (see bottom chart above). Finally, the pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession.

According to the NY Fed model, the chances of a double-dip recession this year or next year? Zero.

About Mark J. Perry 262 Articles

Affiliation: University of Michigan

Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

He holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University in Washington, D.C. and an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota.

Since 1997, Professor Perry has been a member of the Board of Scholars for the Mackinac Center for Public Policy, a nonpartisan research and public policy institute in Michigan.

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2 Comments on NY Fed Treasury Spread Model: Economic Recovery Underway, NO Chance of a Double-Dip Recession

  1. Ref: “Federal Reserve Abolished as of 02 Dec 09”

    Dear Ben,

    We, the People of the United States of America are writing to inform you that, as of the 2nd of Dec 09 your function and service ARE NO LONGER REQUIRED and HAS BEEN ELIMINATED by We, the People, the American people.

    We, the People have come to the conclusions that having the Federal Reserve:
    – Is immoral, impractical, promotes bad economics and it undermines Liberties.
    – Its destructive nature makes it a tool for a tyrannical government.
    – Nothing good comes from your institution.
    – Is the biggest taxer of them all.
    – Is diluting the value of the dollar by increasing its supply is vicious, sinister tax on the poor and the middleclass.
    – Your unchecked powers and policies have brought us to where we are today…
    – Continuation of the same inflationary policies CANNOT revive the current system…
    – The evidence is abundant and that your agency IS AT FAULT and THEREFORE SHOULD BE and WILL BE ABOLISHED!!!

    THE PEOPLE HAVE SPOKEN!
    You sir, have FAILED, your institution has failed the American people. And there’s NO LONGER a need of your function and the institution.

    Best of luck in your future endeavor,
    The Americans, you don’t represent…

  2. One may wonder if the Federal Reserve economists/employees who utilized these models and caculated the chances of a double dip recession to be “zero” are the same men and women who failed to predict the destabilizing recession we are currently experiencing.

    Best regards,

    Charles

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