Current U.S. Recession Probability Gauge
The probability gauge is based on a model consisting of variables that have historically explained most approaching recessions. Some of the strongest performing variables include the term spread (10-year U.S. Treasury yield – the Federal Funds rate), weekly initial jobless claims, consumer confidence, and real equity returns. An estimated probability of more than 50% may be interpreted as a signal of a recession within 12 months.
Of course, models are not perfect and are subject to false or missed signals, as the recession related to the novel coronavirus demonstrated in 2020. The following chart demonstrates the historical accuracy of the baseline model. Readings of 50% or more historically preceded a recession by seven to 18 months (the gray shading indicates recession months; the light blue shading indicates the 12 months prior to recession).
How Close Are We to Stall Speed?
As a complement to identifying the probability of a recession, we also aim to identify “stall speeds,” or the threshold where variables indicate further economic weakness and a heightened probability of a recession (For more details see, “Can This Expansion Last Forever?”). The stall speed for the following model is -0.5.
Stall speeds might arise when economic performance is already soft, making the economy more vulnerable to shocks or slowing momentum. Furthermore, once the economy slows, confidence may be more brittle. Slowing growth may prompt households and firms to preemptively limit their economic vulnerabilities by cutting spending, for example.
The economy's "distance" to stall speed, the minimum number of months to a recession, and the average number of months to a recession at present are displayed in the following table.
Stall Speed Statistics
- 1.49Distance from Stall Speed
- 11Minimum Months to Recession
- 39Average Months to Recession
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The economic and market forecasts presented herein have been generated by PGIM Fixed Income for informational purposes as of October 1, 2021. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Source: PGIM Fixed Income.
Notes on our baseline recession model: Variables include Term Spread, Real S&P500 Index, Nonfinancial Commercial Paper Spread, Initial Unemployment Claims, Real Goods PCE, Consumer Confidence, Housing Permits, and Average Hourly Earnings.
*Information shown are illustrations of the output of PGIM Fixed Income's proprietary models and should not be construed as investment advice.
Economic and market forecasts presented herein reflect our historical judgments as of October 1, 2021. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. PGIM Fixed Income has no obligation to provide updates or changes to these forecasts. Examples are for illustrative purposes only.