Report on US Recession Probabilities Dr. Cem C ¸ akmaklı June 2014 In this report, we publish our recession probability estimates and forecasts for the US economy obtained using the methodology in C ¸ akmaklı et al. (2013), as described below. This report is updated every month, shortly after the release of the Conference Board’s Coincindent Economic Index (CEI) and Leading Economic Index (LEI). The CEI increased 0.3 percent in May to 109.0 (2004 = 100), following a 0.2 percent increase in April, and a 0.4 percent increase in March. The LEI increased 0.5 percent in May to 101.7 (2004 = 100), following a 0.3 percent increase in April, and a 1.0 percent increase in March. The recession probabilities are obtained from a three-regime Markov-Switching model for monthly growth rates for the CEI and LEI. The model assumes that the two variables share the same cycle, where the LEI leads the CEI with lead times at different regimes. These lead times are allowed to be different. The models therefore produce both a ’coincident’ and a ’leading’ probabilities of regimes. The estimated regimes can be classified as ’expansion’, ’mild recession’ and ’severe recession’. We obtain the recession probabilities as the sum of the probabilities of mild and severe recessions. 1 Figure 1: Recession probabilities for the for CEI (top) and LEI (bottom) NBER Recession dates CEI: Recession probabilities CEI: Severe recession probabilities 1.0 0.8 0.6 0.4 0.2 0.0 60 62 64 66 68 70 72 74 NBER Recession dates 76 78 80 82 84 86 88 LEI: Recession probabilities 90 92 94 96 98 00 02 04 06 08 10 12 14 04 06 08 10 12 14 LEI: Severe recession probabilities 1.0 0.8 0.6 0.4 0.2 0.0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 Figure 1 shows coincident and leading recession probabilities since February 1960. These are based on the CEI and LEI vintages released on June 19th. The shaded areas are the recession periods as determined by the NBER. Both the coincident recession probability and the leading recession probability remained constant at 0.00 percent. Predictions of the recession probabilities for June, July and August 2014 is 0.02, 0.04 and 0.05, respectively. Our findings suggest that the negative US GDP growth of −0.4 in the first quarter of 2014 is a temporary shock with only shortlasting effect. Prediction of recession probabilities close to 0 indicates that the current expansion is likely to continue in the foreseeable future without any interruption. For a clearer picture, Figure 2 shows recession probability estimates over the period from January 2000 until May 2014. 2 Figure 2: Recession probabilities for the US economy after 2000 NBER Recession dates CEI: Recession probabilities CEI: Severe recession probabilities 1.0 0.8 0.6 0.4 0.2 0.0 2000 2001 2002 2003 2004 2005 2006 2007 3 2008 2009 2010 2011 2012 2013 2014 References C ¸ akmaklı C, Paap R, Van Dijk D. 2013. Measuring and predicting heterogeneous recessions. Journal of Economic Dynamics and Control 37: 2195–2216. 4

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# Report on US Recession Probabilities