Recession Probability for Term Spread thru 2/24

If the last few days of February is like the rest, then recession probabilities are up. Using a plain-vanilla probit model of recession based on the10yr-3mo spread, the following recession probabilities are obtained.

Figure 1: 10 year-3 month Treasury spread (blue, left scale), recession probability from probit model (red, right scale), NBER recession dates shaded gray. Feb2020 observation for data through 2/24. Source: Federal Reserve via FRED, NBER, and author’s calculations.

Of course, the usual caveats regarding the term premium apply.

Interestingly, market expectations of a recession by January 2021 have risen substantially in the past few days.

Figure 2: 10 year-3 month Treasury spread (blue, left scale), recession probability in Trump’s first term, from PredictIt (red, right scale). Source: Federal Reserve via FRED, PredictIt.


58 thoughts on “Recession Probability for Term Spread thru 2/24

  1. NewDeal democrat

    Very interesting, and has caused me to go play with my interest rate and inflation models. But to cut to the chase, the bond market is saying that coronavirus is likely enough to turn the recent slowdown into a recession.

    Of course, from the first inversion almost 15 months ago, the issue has been *which* term spread is right, and which is wrong. For example, the 10 year minus 2 year has never inverted except for about 3 days last summer.

  2. Bruce Hall

    An epidemic or fear of one can certainly have a temporary dampening effect on the economy. These types of events are generally less serious than daily media reports would suggest in terms of fatalities, but they are disruptive. We’ve had similar scares with SARS, MERS, and Ebola. While influenza has a lower mortality rate than these other infections, it is more prevalent and more people die annually as a result. But we’ve generally become inured to the dangers of the flu when it comes to the economic impact.

    CDC estimates that so far this season there have been at least 29 million flu illnesses, 280,000 hospitalizations and 16,000 deaths from flu.

    1. Chris

      Temporary outbreaks of the past have not sidelined a major chunk of the economy nor disrupted supply lines as COV-19 has. Honestly, the past is not so instructive as to how to handle the hard landing we’re going to endure starting this month and the remainder of 1st semester 2020.

    2. baffling

      bruce, be careful. you are treading on terms like “temporary” in the same way that corev argued the soybean crash was only “temporary” until trump won the trade war. you are moving into the realm of rationalization.

      i would be careful of downplaying coronavirus. and i hope my pessimism does not become reality. but it appears that the new coronavirus has more in common with the flu than sars, mers and ebola. it is not lethal like those three, thankfully. but it appears to be quite contagious, just like the flu. except that it is an order of magnitude more lethal than the flu. not a good combination. i think it has a better chance of playing out like the spanish flu than sars or mers. it is going to be a demographic shaper unless we get it under control.

      1. soren impey

        “it is an order of magnitude more lethal than the flu”

        The numbers on this are not yet known. Also, the flue shows large variability in its fatality rate.

        1. baffling

          so far, that is what the numbers indicate. it would be foolish to take action based on rosey hypotheticals not supported by the numbers. unlike the flu, this virus is targeting health care providers. that is a major problem typically not encountered by the yearly flu season. you fall very far behind the curve when you do not treat a pandemic properly in its early stages, usually from denial. this has happened to an extent.

      2. David

        “an order of magnitude more lethal than the flu”

        Almost two orders of magnitude. Influenza by BH’s own numbers 29M/16K=0.05%. COVID-19 is about 2-3%

    3. Barkley Rosser

      It does not help that Trump has dismantled parts of the administration in place to deal with invading diseases and cut funding for other parts of it.

        1. Barkley Rosser

          In addition to the CDC and NIH cuts, he completely removed the apparatus in the National Security Council and elsewhere in the White House due to his Obama Derangement Syndrome, getting rid of anything and everything that was remotely due to Obama, with him having put this apparatus in place during the Ebola scare, with even GOPster like Newt Gingrich admitting on Fox News that Obama handled the Ebola situation well.

  3. pgl

    Trump’s utter incompetence may make US more vulnerable to the CoronaVirus:

    ‘The Trump administration on Tuesday faced a new threat in the mounting coronavirus crisis: a big bipartisan backlash. Administration officials tried to swat away concerns their emergency request for $2.5 billion to address the outbreak was not enough even as some Republicans joined Democrats in criticizing the amount — and a lack of transparency around efforts to contain the disease on U.S. soil. The closed-door briefing with more than a dozen senators came amid new fears of an outbreak in the United States, with a top Centers for Disease Control and Prevention official warning that spread of the respiratory illness in the country is now inevitable. Officials said a burst of new cases in countries like South Korea and Italy prompted the new, urgent warning. That news and the angst on Capitol Hill is threatening to overwhelm the messaging from President Donald Trump and some of his aides, who have been trying to downplay the situation in hopes they can put a lid on the stock market tumble and cable news coverage of mounting deaths around the world. Trump’s advisers and political allies are increasingly concerned that a botched response could hurt the U.S. economy and put his reelection prospects at risk.’

    Trump is not really concerned that Americans may die as a result of his incompetence. All he cares about is whether this will hurt him in the polls. Time to blame Schumer, Biden, and any other convenient Democrat.

  4. macroduck

    Industrial output is at greater risk than service output because of supply chain disruption. The U.S. factory sector has already weakened considerably, and now faces another threat. The spread of economic impact from covid 19 is an important factor in transmission of risk, Does an already-damaged industrial sector represent a greater or lesser risk, when facing supply-chain disruption, than a till-now healthy industrial sector?

    The big independent risk from covid 19 to the U.S. service sector is a domestic epidemic. Absent a domestic epidemic, can supply-chain disruptions cause recession? I don’t think that’s likely, but I’m just guessing (same as everybody else).

  5. Willie

    The market is way off. It’s either overreacting or somehow knows something. If the economy absorbs this bug and just keeps right on chugging along, I’m not sure what to think.

  6. oee

    the economy was in recession already. this similar to the last recession. the economy was in recession by Dec 2007. However, the corporate press was denying the fact until the Sept 2008 Lehman bankruptcy. Also, the stock market was a bubble. 40 % of S & P companies were not making profits, and corporate profits peaked in 2014. Therefore, the covid 19 situation burst this bubble.

      1. Dave

        Looking at the IVA/CCAdj version, it really looks like that 2014 peak is quite anomalous. Not convinced profits are actually falling since 2014 versus just flat-ish.

      1. pgl

        C corporation profits have been falling. If a company decides to exit the status of being a C corporation which some have done, these reported corporate profits as a share of overall business profits has declined.

      2. Dave

        Corporate profits as a per cent of the economy declining is not necessarily a bad thing. Perhaps this is a sign that more economic growth is going to labor.

        1. pgl

          “Perhaps this is a sign that more economic growth is going to labor.”

          Has it? Compensation of employees as a share of personal income was 65.4% as 2008QI. As of 2019Q4, it was only 61.5%.

  7. Moses Herzog

    Off-topic, related to political debates
    Pete Buttigieg has repeatedly asked during debates for voters to talk to blacks in the city he led about his record on treatment of blacks and issues important to blacks. Guess what?? Somebody did:

    Buttigieg treats blacks like sh– . He’s a Republican in lamb’s clothing. This guy is near as pragmatic as donald trump–and that’s a recipe for disaster for America. A man with ZERO core beliefs other than his own advancement.

    1. ilsm


      I actually watched the CBS refereed brawl (aka debate) in Charleston…… Wall Street Pete came across as a centrist war candidate, he could have pleased Fionna Hill! I felt the questions on foreign matters were pointed to a centrist republican a bit left of Barry Goldwater, but that’s CBS news who did not call for neutral corners during the frequent ‘clinches’.

      The question on Idlib was shaded toward Syria/Russia collateral/humanitarian bombing damage on the order of the US’ record in the region. Warren’s answer that the US had no military solution stopped the tread where it should have ended! Bernie could not weigh in.

      Bernie did quite well handling the “hits” while Bloomberg got more “hits” than I expected.

      I saw a divide between the moderates on stage who are realists, not hopeful for many progressive implementations and Bernie who quoted Nelson Mandela: “It always seems impossible until it is done.”

      Bernie is getting a lot of people’s hopes up!

        1. pgl

          Exactly – so when you read “Bernie is getting a lot of people’s hopes up!” we may be talking about people who wear MAGA hats.

          1. ilsm


            Seemed to me there were two kinds of candidate on the stage last night. One kind has [too?] bold vision of change that might excite the otherwise inattentive.

            The other thinks they need to be centrist republicans, keep the Atlantic Council happy and rock no boats their pitch is beat Trump. There is, to me, a vast difference between beating Trump and moving a country forward.


          2. Moses Herzog

            @ pgl
            Many respected polls have Bernie winning a head-to-head match-up against donald trump. Maybe if you stopped watching Norah O’Donnell’s CBS Evening News with 25 minutes of pharmaceutical commercials and 5 minutes video of the local Down syndrome child as the Podunk Kansas high school mascot at the end that’s supposed to give us a sentimental “warm fuzzy” and you stopped clicking on whatever story “TPM” stole 48 hours after Politico and Bloomberg news ran it, you’d know that already.

            But pgl, I think you’d be happiest watching the new Burstein documentary. Hillary has lots of excuses why she couldn’t win the race even with Debbie Wasserman C*ntz tying one of Bernie’s hands behind his back. Until you can watch the documentary, here’s some photos of women in comfortable shoes to tide you over and get the superglue going in your shorts:

        2. Willie

          Neither could Trump, according to the conventional wisdom. I’m not a Bernie fan, but I also won’t call him un-electable.

          1. baffling

            he may not be trump, but bernie will damage the country in his own way. unless trump does something so outrageous that he cannot be elected (not sure if that is possible), i honestly do not see how bernie beats him. in the country today, the voting public seems to have less disdain for a racist than a socialist. or in a different sense, more people are willing to vote for a racist philanderer than a socialist. it is not about who dislikes you, it is about who you can get out to vote for you. it will be easier to beat trump with a moderate.

          2. pgl

            Pelosi agrees with you. I’m not so sure. But I could be wrong.

            BTW – tell Bernie Bro ilsm that I was not saying Senator Sanders was proposing bad policies. I like a lot of his ideas. What I was questioning was indeed whether he could win the election. Of course ilsm is clearly so brain dead by now that I needed to draw my point in crayons for the poor boy.

        3. macroduck

          I’ve never seen any evidence that “electability” is an obsevable quality. People claim to know who can or cannot win, but don’t actually know. The “Bernie can’t win” stuff is just this election’s version of election-as-horse-race.

          Just a few weeks ago, the “electability” story was that electability doubts would prove self-fulfilling. So much for that dumb idea. We’ll know who is electable in a few months.

          1. 2slugbaits

            “Electability” might be a difficult quality to observe, but “unelectable” is a lot more clear cut.

      1. Moses Herzog

        @ ilsm
        I don’t think Fiona Hill is “pro war”. I think she’s an American patriot and a hero and she makes me feel proud deep in my bones to be an American. Other than that, if you’re voting for Bernie I have no desire to “duke it out with you” online. Stay Frosty

        1. pgl

          Fiona Hill is certainly more of a patriot than John Bolton.

          Now if Senator Sanders wins the Democratic nomination, I will be supporting him 100%. Then again – I would even support THE BLOOMBERG (cough, cough) over Trump.

          1. Willie

            Yep, pretty much my thoughts, too. I’m not a Bernie fan at all, but unlike Trump, he won’t have a supine Senate that will enable him. So, less damage to worry about if for only negative reasons. A toybox full of stuffed animals would be more competent than the current administration.

        2. ilsm


          I do not know Ms Hill beyond her testimony in the impeachment and her (wiki) background in the Beltway foreign policy “establishment”.

          She may or may not be “pro war” that is a judgment I refrain to make. I think she forwards an “establishment” foreign policy, which might be too into a new cold war to my liking.

          She (like A. Vindman) testified she was “troubled” (not withstanding political presumptions about intent) by the idea of not arming Ukraine threatened by rebels (Russian aggressors!) in Donbas People’s Republics.

          We have discussed here the Russian order of battle in Donetz, we have not discussed the forces on the Ukraine side, which includes militias like Azov Battalion linked to right wing factions.

          Is there a likeness to US “support” to opposition (Mujahedeen) to Russian aggression in Afghanistan in the 1980’s? Should we care?

          1. Barkley Rosser


            The new government of Zelensky has sought to actively suppress the overtly neo-fascist elements on the Ukrainian side in all this, something not at all helped by the corrupt interventions by Trump and Giuliani, et al.

  8. joseph

    Well, Trump finally is on it. It’s become a crisis. He’s furious that the stock market is down, jeopardizing his re-election.

    Trump: “We are close to having a vaccine.”

    White House press office: “He was talking about ebola.”

    We are doomed.

    1. Moses Herzog

      @ Joseph
      Joe baby, have you noticed there are ZERO evangelicals or fundamentalist “Christians” telling us this most likely man-made disaster (from eating one of the like five unclean animals on planet Earth that’s dirtier than a pig) is “punishment by God” for voting for an amoral bastard who calls himself a “very stable genius”?? How strange….. I guess the “punishment by God” thing only works when “dirty liberals” are in the White House. Make a note of this for next time you wanna give the middle finger to Mother Nature, ok Joseph?? Next time you wanna eat fried Sunda pangolin or make “hot pot” with some cat that ate a rat like 10 minutes ago, try to make sure some rotten liberal like LBJ is in office, so at least we can make a logical storyline out of this, ok??

  9. Moses Herzog

    I’ve been using the word “panic” to describe a lot of the reaction to COVID-19. I believe there is some evidence of that. But here is something interesting I lifted from an Axios article by Caitlin Owens:
    “FDA commissioner Stephen Hahn is not a member of the task force that the administration has assembled to handle the coronavirus. Only two of the dozen members of the task force are physician-scientists, BioCentury noted on Friday.”

    There’s been some discussion, that the GVC of materials and drugs and manufacturers in China could affect drug supply in America—-i.e. There could be a shortage of drugs in America because of Coronavirus, EVEN if coronavirus ends up NOT spreading in America, which CDC is now saying it will.

    Could we have MORE deaths due to drug shortages in America, than from the actual COVID-19 itself?? If I may be so arrogant to say, I think it’s a very intelligent question, and one leaders should be thinking about right now. THAT is something that could cause true panic (and JUSTIFIED panic??) in America.

    1. baffling

      “Could we have MORE deaths due to drug shortages in America, than from the actual COVID-19 itself?? ”
      now i pose a question to steven kopits. if this were to occur, would those deaths be considered coronavirus related? or simply acceleration of a naturally inevitable outcome?

      1. pgl

        I suspect it will be some time before steven kopits gets around to this question. After all – he is busy mining the data to show that the rest of us have overreported the extent of this virus.

  10. pgl

    How do we know that the U.S. is not ready for the Corona Virus? We know because Trump is turning to Lawrence Kudlow for his “expertise”:

    Kudlow breaks with CDC on coronavirus: ‘We have contained this’. The White House economic adviser suggested that the virus’ impact is “not going to last forever.”

    White House National Economic Council Director Larry Kudlow said Tuesday that the U.S. has “contained” the threat of a domestic coronavirus outbreak, breaking with the warnings of officials from the Centers for Disease Control and Prevention. “We have contained this, I won’t say airtight but pretty close to airtight,” Kudlow told CNBC’s Kelly Evans on Tuesday afternoon. Kudlow’s confidence was set against U.S. stocks, which suffered their worst day in two years on Monday and were down again Tuesday amid fears that the coronavirus could mushroom into a pandemic. But the White House economic adviser suggested that the virus’ impact is “not going to last forever.” “This is a human tragedy,” particularly in China, Kudlow emphasized multiple times. But warning against overreaction, he added, “The business and the economic side, I don’t think it’s going to be an economic tragedy at all. There’ll be some stumbles.”

    Seriously? People may die in droves and this cokehead who does not even know economics is telling us that the stock market decline will not last forever? On the health issue – CDC knows its stuff whereas Lawrence Cokehead knows nothing.

    Some in Congress are calling for an immediate $8.5 billion program but Trump thinks $2.5 billion is enough. After all – he still needs to divert funds to pay for his racist wall.

    1. baffling

      i have hinted at the following comment, but refrained from stating it so bluntly. the coronavirus is a demographic changer, as it really hits the elderly and those with preexisting health conditions the hardest. in light of the conservative agenda in health care, do you really think they are concerned that this virus will disproportionately impact the elderly and the sick? in their view, this is nature’s way, or god’s way, of entitlement reform. this is why kudlow has no concerns in the longer run. it may be a dark comment, but it is not incorrect.

      1. pgl

        If it hits elderly people who tend to vote Democrat – the Trump Republicans would be elated. Of course, some of these old people with preexisting conditions and living on Soc. Security retirement benefits wear MAGA hats for some reason. Of course Dr. Lawrence Kudlow is now telling us wearing a MAGA hat protects one from CoronaVirus.

    2. Barkley Rosser

      Don’t worry. Not a problem. The stock market did fall again today (Wednesday), but the rate of decline has decelerated, just as the rate of new cases in China is declining. Everything Under Control!

  11. joseph

    Trump has put Mike Pence in charge of managing the coronavirus. This is the guy who wrote an editorial declaring that nobody has ever proved that smoking kills.

    We are all doomed.

  12. 2slugbaits

    We shouldn’t forget that young people will be heading out for spring break in the next few weeks. Since the symptoms appear to be mild for young, healthy people, they might end up becoming carriers without even knowing it.

    States should probably make plans for absentee ballots this election cycle…unless Trump uses the pandemic as an excuse to suspend elections.

    1. baffling

      “States should probably make plans for absentee ballots this election cycle…unless Trump uses the pandemic as an excuse to suspend elections.’
      agreed. in fact, we should already have an online voting system. we are in the 21st century with this thing called the internet. why are we still voting like it is the 1940’s?? on the other hand, the iowa fiasco shows current civic leadership seems unable to harness the power of modern technology. maybe its time to let the next generation take over.

    2. pgl

      “Healthy people – if you are healthy, you will go through a process but you will be fine.” – Trump on people recovering from CoronaVirus. Lord – what a babbling idiot!

  13. baffling

    donald and his lackeys like to use the stock market as their barometer of success. now they own this. todays stock market drop was the largest point drop in history.

    not sure if others noticed this detail, but the largest potential domestic crisis in recent history has been punted by donald to mike pence. donald knows he is out of his league, and that this probably won’t end well. he is already setting up pence as the scapegoat should things go bad. leadership and responsibility are not donalds best traits. this move was made to protect trump at pence expense. EVERYBODY gets thrown under the bus at some time or other if they stick around donald long enough.

    1. Barkley Rosser

      Oh, but this is all the fault of Dems an CNN. Really, baffling, don’t you have your MAGA hat, or maybe KAG hat, on in the right position on your head to make sure that your brain is not able to do anything other than nod and say “yes,” when our Great Leader Speaks?

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