Models show risks of US recession are at a two-year low

The relatively tepid 1.6% annualized gain in Q1 GDP does not present cause for concern, nor does it mean the economy is heading toward a recession. Our newly revamped suite of recession models, which leverage probit regressions to assess the risk of potential recessions, support our view that strong consumer spending and a tight labor market mean the economy is set to expand over the rest of the year.

What you will learn:

• The yield-curve model, which correctly identified each of the prior eight recessions, has signaled an imminent recession since Q4 2022. With traditional leading indicators performing poorly in this economic cycle, we created multivariate probit models with sentiment-based, macroeconomic, and financial indicators to provide a more robust signal of potential recessions.
• While the sentiment-based and macro indicators we identified provide a strong fit in proceeding recessions dating back to 1973, their signal is limited to the six- or nine-month horizons, depending on the indicator. This contrasts with the signal from the yield curve model, which improves as the horizon increases. Our three- and six-month models show recession risks are at their lowest levels since the two consecutive quarters of negative growth in 2022.
• No model is perfect, and the breakdown of the yield-curve model in this cycle confirms it cannot be taken as gospel. However, our new models provide additional information, which, in tandem with our other research, can help provide better insights to our forecast.