USA Recession Odds: 100%?

Here’s an interesting new data point that the St Louis Fed has put together to calculate recession probabilities:

“Recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. “

What’s interesting about this index is the current reading.  At 20%, the index is at a level that has ALWAYS been followed by a recession.  As you can see below, the index has never approached 20% without a subsequent recession.  All 6 recessions since 1967 have coincided with 20%+ readings in the US Recession Probabilities index.

Interestingly, I still don’t see recession in my internal indicators.  Those indicators have been right for a long time now (in the face of some very public recession predictions by reputable people).  So I am afraid when my internal indicators point to “no recession” when an indicator like this clearly puts that opinion in the “this time is different” category….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • D

    I see a bunch of readings at 10 and 15%. This could just be a slightly more extreme version of those. I don’t see a recession either in the next 3-6 months, but a lot of that is influenced by you lol!

  • barak

    being a physicist i think that in general 0% growth, or low growth are what is called a “non stable equilibrium”, meaning that some change or shock at this point will lead to a fast decline. that is the reason why when you get to 20% chance of recession it’s already too late to change direction. however, with housing firming any decline will probably be much milder, barring unpleasant surprises from europe. that said, with p/e of over 14 and high expectations for growth in 2013, the recession odds are clearly not in the market’s sights.

  • Dennis

    who is Jeremy Piger?

    Originally Posted by Jeffwhosoever:
    Isn’t the risk of recession affected by the sequestration in January?
    Probably so. The graph doesn’t tell you is what would cause it’s inputs to worsen over time. But certainly something like the “fiscal cliff” would be a catalyst for bad economic data rolling in.

  • micro2macro


    Your internal indicators must be flawed. It’s obvious isn’t it? You dont have a:

    “dynamic factor markov-switching model applied to four monthly coincident variables”

    I think these are available at most Wal-marts….If you get one of those then you will have a recession.

  • Dennis

    Original graph by Jeremy Piger:

    Originally Posted by Jeffwhosoever:
    Isn’t the risk of recession affected by the sequestration in January?

    ans Jeremy Piger:
    Probably so. The graph doesn’t tell you is what would cause it’s inputs to worsen over time. But certainly something like the “fiscal cliff” would be a catalyst for bad economic data rolling in.

  • Wulfram

    My gut feeling is that in general, recessions happen every half decade or so . Given that it’s been about 5 years since the last one, continued troubles in Europe, uncertainty in China, and the upcoming fiscal cliff — the most likely scenario is a lame duck Obama — we’re probably due for a recession in 2013. Monetary policy is likely going to be of no help in this scenario.

    Fortunately, any recession should be mild in nature since balance sheets have improved quite a bit. Unfortunately, the return to normal growth will be slow given the ineffectiveness of monetary policy, demographic trends, and high student debt in millennials.

  • Nils

    depends if “dynamic factor markov-switching model applied to four monthly coincident variables” sales is a variable in the model. Basic science, Bro.

  • micro2macro

    Doh! I knew I should have bought one when the door to door guy offered it…..

  • failedevolution

    Capitalism has succeeded in maximizing the middle class in the West, but now, it’s most horrible mutation, exploits the large heterogeneity of the middle class – which was well hidden beneath a veil of fake prosperity – in order to survive and totally dominate. This new mutation of capitalism, either will be able to create new tanks of consumers and therefore survive through a global cultural totalitarianism, or, through its frenzied course, will eliminate the middle class, violate its “promise” for a better life, and eventually, destroy itself.

  • KB


    What is the timeframe for your indicators?

    On the composite basis (if any?), do they show elevated chances of recession, or are flat at zero chance?

    What is their predictive power – if they are leadidng, how far the lead is?

  • But What Do I Know?

    I think you could interpret that chart to mean that “unless we get to 0.4 (40%) we won’t have a recession” just as easily as “At 20%, the index is at a level that has ALWAYS been followed by a recession.” Not that you aren’t right to reexamine your own methodologies, but I don’t see that the chart above invalidates them (yet).

  • Mikael Olsson

    Follow the money. The increased GDP since 2009 is only going into higher profits, not higher wages. Anyone here think those higher profits are going into investment or shopping?

    Add eurozone weakness to the mix. Oy ve.

  • Joseph Browning

    I can’t really see very well on that chart, but it kinda looks like some of those 20%’s occurred at the same time or before the recession. And of course the truism, “Something that has predicted future economic behavior correctly in the past will eventually fail to do so in the future” may be in play.

  • freemarketeer

    Nah dude, you can’t go discount on markov-switching models. You have to get the artisan stuff at your local dynamic factor boutique in brooklyn.

  • Dwaine van Vuuren

    I have followed Pigers models for many years. Go look at the vintages of this indicator. It is prone to huge spikes that only get revised down the following month. You need to see 2-3 consecutive readings above 20% to read anything into the Markoff model. I track the 4 NBER indicators diligently at – this does not have large spikes that get revised away

  • Cullen Roche

    Looks like I’ll head over the Wal-Mart then! :-)

  • Cullen Roche

    Good to know. Thanks.

  • Gary_UK

    Recession eh? Is that the ‘recession’ as measured by the govt’s Keynesian measure known as GDP?

    Irrelevant, as GDP includes govt spending, which adds nothing in terms of real wealth to the economy.

    All you guys need to know is 46+ million on foodstamps, real wages falling, and real unemployment rates up at 16%, and add in corporate profits sliding fast, orders falling, and all of this despite global printing of trillions of new dollars/Yen/Sterling/Yuan.

    The game is over, you are seeing it due before your eyes, but blinded by govt data you think it isn’t happening.

    But then, sell-side pundits have to sing a bullish tune don’t they?

  • Cullen Roche

    You’re being way too general. You say govt spending adds nothing to real wealth. How do you explain a correlation like this?,FGEXPND&scale=Left,Right&range=Max,Max&cosd=1949-10-01,1947-01-01&coed=2012-04-01,2012-07-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Quarterly%2C+End+of+Period,Quarterly&fam=avg,avg&fgst=lin,lin&transformation=lin,lin&vintage_date=2012-11-06,2012-11-06&revision_date=2012-11-06,2012-11-06

    Clearly, govt spending can be negative and highly inefficient. I am certainly not saying govt spending always results in wealth creation or increasing living standards, but you better be able to explain away the above correlation before making such a bold statement.

  • Dwaine van Vuuren

    Scratched out an old email conversation I had with Piger going through the revisions on his model. His quote :”In the paper that Marcelle and I have, we argued for a recession call when the probabilities had risen above 80% for three consecutive months. This put a high premium on not calling false positives. “

  • Tom

    Amazed that anyone can perceive the US is not in recession.
    Mixed data due to phony economy and money.

    The empire is crumbling LOL…

  • Adam2

    Private spending is also not real wealth as well.

    Snake oil, planned obsolescence, financial planner fees… haha…

  • Adam2

    We are in a muddle, not a recession. A recession is what happened 4 years ago.

  • Gary_UK

    It’s a bubble, currently bursting, very little on that graph is real (i.e. it is mostly financial assets that rely on certain assumptions of everlasting growth).

    But the US Govt will not be able to stand by and let it collapse, you know what they will do…..print print and print again. Nominally the bubble will not collapse, in fact nominally the stock market could hit all-time highs. But only in collapsing dollar terms.

  • http://na Rod Carlson

    The problem of slow GDP growth is a lack of confidence, especially on the part of business. Investment is weak; meantime, corporate holdings of cash, including overseas profits are in the Trillions. Business is waiting for “someone else” to create growth, which won’t happen until more jobs are created. As things stand, the “middle class” can’t afford to support a reasonable growth economy.

  • John Hendricks

    Something rarely discussed is the accuracy of the economic models on which the analysis is based, and the accuracy of the data. For example, the official unemployment rate is in the 7% range, though it is generally known that this is simply not accurate. If the real unemployment rate were entered, the results would be very different. Similarly, the rate of inflation is a fiction. If a more accurate rate of inflation were entered, the results would be very different. I suspect that more accurate data would show that there was no recovery.

  • Jo Anne

    Let’s talk SIMPLE….The majority of our population refuses to understand that the government is US. “We” are robbing ourselves in mismanagement of our own money. The real problem is that we have no more cash money, only paper investments and this is why we need to call it “borrowed money”. The banks kept all our cash and spent it. Once you make a deposit it becomes the banks money, you may not get it all back when you want it. They spend it for you.HELLO!They lend it out to other people and buy assets for themselves with YOUR money. Borrowing what you cannot pay back is a DEBT. This is why it is called a ‘deficit’. We owe, we owe and we have less jobs to go to–less homes and mortgages to tax…-Taxes come from revenue on YOUR assets, not Uncle Sam’s…..what do you think? (while our Uncle spends your money with gusto)!Money grows on trees? Try giving Wal-Mart an I.O.U, for your grocery cart next time and see what happens. Now do you see reality? Want to keep playing monopoly with fake money in a real life? We created this system and we NOW find it flawed with loop holes, and dreams that are based on inflated and fake prosperity, WE created. Ever heard the term, “in your dreams”? Well, get real we are living in a bad dream WE created only it is REAL. Rich or poor it is good to have a little money. Question is how real is our money today? Now do you get it? We created this! How will we pay for what we can now not afford based on our invention? Hungry? Eat paper? Your diet determines what you become and are. When will we live within our means and not spend what we do not have? This is what is carrying America. DEBT. Monetized debt and debt from debt is still debt. You can’t eat paper for lunch. When food costs us an ‘arm and a leg’, then what? Get the picture now? Get real before it is too late and bread does costs $1,000.a loaf and even the bread maker goes broke. Can’t eat the rack yourself and make a profit. Are you getting this reality? Look around, who is shopping at Wal-Mart with YOUR money!America needs to take care of home, we need to turn to ourselves and finally see what we have become.This is the CHANGE that is overdue….before it is too late. Jesus, probably would be a good Jewish banker to save us,and might be our next true banker, soon, if all else fails. Do you know if he wants to come back and teach us what he knows about True Banking? He found coins to pay taxes in a fish’s mouth, so the Story goes. Maybe IF he took a time share upstairs and we can’t afford to get him back since we do not have NASA to help with his transportation? We have lived in a DREAMY Derivative Land too long now in “our” dreams. Wake up America stop dreaming. The American Dream is our creation and creating money when our gold is gone, debt is more real, and greater is our foolishness.Can’t blame anyone else. How simple can you put it to understand what WE created!Get the legal jargon out of the way—think!!! Stop robbing Peter to pay Paul. Don’t blame anyone else. We are in deep trouble if you do not understand.Recovery will take letting what we do have go and starting all over again…live within our means in truth not in a dream. Question is who will be saved? The rich or the poor? What is done is done. Maybe Obama has a plan? You betcha!!…and God help us.

  • wunsacon

    >> …govt spending, which adds nothing in terms of real wealth to the economy…. All you guys need to know is 46+ million on foodstamps, real wages falling, and real unemployment rates up at 16%,

    Feeding people is the most “real” of “real wealth” you could possibly ask for. Take your head out of the economic model discussions and regain sight of the world these models attempt to cover.

    And it’s not their fault they’re unemployable. It’s inevitable to run into surpluses in any business — including the business of labor.

    Further, remember these are people the economy no longer needs, after we outsourced jobs to the rest of the world and are busy automating human labor into irrelevance. Therefore, expect the number to increase.

  • wunsacon

    Yep. I’m tired of reading people proclaim that government spending doesn’t produce “real” wealth, whereas spending on new SUVs, iPads, manicures, and NASCAR tickets *does*. Or that public businesses like the US Post Office (intentionally torpedoed by the Republicans) is any less sustainable than the private buggy whip business.

  • Tech1

    The CBO forecasts a recession mostly due to the Jan. 1st deadline for huge tax increases and government cuts. As to the depth of this? The EU is going into contraction and Germany is getting hit. Consumers will cut back spending as the average four member houshold will see $2,200 less cash and then you have stock dividends being taxedat a much higher rate. Projections for the effects of the “Fiscal Cliff” are negative GDP in the first half unless a deadlocked Congess delays what might have been 4-5% growth. My guess is the dollar would gain support and Treasury funds might be a safe place while commodities and equities either stagnated or declined for awhile. Natural gas, utlilities using gas, agriculure, PG, AT&T, ED, WMT, etc. might be good and of course cash. I track the oil price for direction as the Petrodollar is still the world reserve currency and oil is sold for it.

  • bart

    Great detective work Cullen.

    Here’s one of many charts that are at or close to recession levels.

  • Mikael Olsson

    An error all too many economists make – thinking that the shuffling of (virtual) greenbacks is primary. It is not. The real world is primary. And the real world is hugely productive. Our only limitation right now is access to money.

  • Mikael Olsson

    The problem of slow GDP is that profits are not fed back into the economy. Because the profits have been increasing ever since the recession trough.

  • Mikael Olsson

    What you probably want to look at is the U6 number:

    It’s not pretty. It really is getting better – but of course nowhere near pre-recession levels. Heck it’s still worse than the bottom of the previous recessions.

    You are right about the rate of inflation being… well.. semi-bogus. CPI is not nearly wide enough. tries to reconstruct the measure used before the 80s and it does indeed show a different story.

    What you are asking for is a “cost of living index”. The CPI is not this.

  • Mikael Olsson

    The paper money didn’t disappear. What DID happen is that banks have kept creating credit (which you or someone else pays interest on). The amount of credit-created money in the system is now 97%.

    Yes, it is bad. But you are getting the facts wrong, which will hamper your debate. Brush up =)

  • dewey black

    Wake up. The ugliest word combination in the lexicon, especially when given as an order, and super-especially if meant figuratively. Who do you think your listeners are, an high school auditorium of sophomores at 8:00 am?

  • LRM

    I wanted to reference this post by Jeff Miller at Dash as a good objective analysis of the chart in this PC post.

    He also references Dwaine Van Vuuwen who has commented above. Dwaine has been doing regular updates at for guite some time and has been very measured in his analysis of the factors that measure recessions.
    Juat wanted to thank Dwaine for his work at dshort and hope he continues to keep us less mathmatically able readers informed and updated.
    Jeff Millar also seems like a “pragmatic ” fellow and well worth reading.
    Lots of good stuff on the internet but also necessary to look at different points of view.
    Not sure what actions to take after viewing both sides but at least I have the information!!!!!

  • Dwaine van vuuren

    The 100% interpretation on this model is thoroughly debunked over here :

  • LRM

    Thanks for that link to your post. That is a thorough analysis so appreciate your efforts and generous sharing of you “numbers ability” gift.

    The Fed must have anticipated the decline now showing up as the Aug decline and moved in with the QE3 stimulus .

    You may not wish to comment but how do you feel that the stimulus is acting on the economy to rescue the swoons mentioned or is this just normal economic recovery activity and merely coincidental the the easing measures have an appearance of “saving” the economy?

  • l.n.

    Marcelle Chauvet, the co-author of the paper, has now weighed in personally:

    Money quote: “The model is *not* signaling a recession. On the contrary, the probability that the economy was in an expansion in August is 80%.”