Tuesday, November 27, 2012

Update: The Recession Probability Chart

by Calculated Risk on 11/27/2012 05:36:00 PM

A few weeks ago, I mentioned a recession probability chart from the St Louis Fed that was making the rounds. (see below). This graph shouldn't be interpreted as indicating a new recession. Jeff Miller at a Dash of Insight discussed why: Debunking the 100% Recession Chart.

Now the author, University of Oregon Professor Jeremy Piger, posted some FAQs and data for the chart online. Professor Piger writes:

2. How should I interpret these probabilities as a recession signal?

Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion. For an analysis of the performance of the model for identifying new turning points in real time, see:

Chauvet, M. and J. Piger, “A Comparison of the Real-Time Performance of Business Cycle Dating Methods,” Journal of Business and Economic Statistics, 2008.
St Louis Fed Recession Probability Click on graph for larger image in new window.

Here is the chart from FRED at the St Louis Fed.

Obviously we haven't seen three consecutive months above 80%. Also I expect the recent data point to be revised down.

This is kind of a Woody Allen and Marshall McLuhan moment! Those arguing this chart indicated a 100% probability of a new recession knew nothing of Piger's work.

Earlier on House Prices:
Case-Shiller: Comp 20 House Prices increased 3.0% year-over-year in September
Case-Shiller House Price Comments and Graphs
Real House Prices, Price-to-Rent Ratio
All Current House Price Graphs