If no recession is forthcoming, what can we conclude, given most term spread models were signaling a “sure bet”? Unlikely outcome (it’s a probabilistic world!), breakdown in historical correlations, omitted variable problem? In order to shed some light on this question, I examine probability estimates from (i) plain vanilla spread, (ii) debt-service-ratio and foreign term spread augmented, and (iii) term-premium adjusted spread specifications.
Figure 1: Estimated 12 month ahead recession probabilities, based on spread and short rate (blue), on spread, short rate, debt service ratio and foreign term spread (tan), and term premium adjusted term spread (green). NBER defined peak to trough recession dates shaded gray. Source: NBER and author’s calculations.
Estimated 12 month ahead recession probabilities are obtained using probit models. The first specification (blue line) is a plain vanilla term spread model estimated 1990-2023M04 assuming no recession in the US to 2024M04. The second (tan line) is that described in Chinn and Laurent (2024), dropping the Financial Conditions Index which did not provide much incremental predictive power. The third specification (green) uses only a term spread, where the long rate is adjusted to remove the term premium estimated per Kim and Wright (1995). Some motivation for this modification is here.
Notably, the plain vanilla term spread model provided the highest estimated probability of recession. The other two specifications do not yield estimates that breach 50%. Interestingly, the maximum probabilities are in May 2024. Since we don’t have any statistics for May — aside from the Lewis-Mertens-Stock/NY Fed Weekly Economic Index and the Baumeister-Leiva-Leon-Sims Weekly Economic Conditions Indicators (both include data for releases through May 11th), it’s possible that we just haven’t seen the data yet. (I still remember how in April/May 2001, many thought we’d dodged a recession, based on the data available at the time).
When I was a young man, some 30 years ago, or really 22 years ago on my weird personal maturity index……. Majoring in Finance at a SMALL 4-year state college, some phrases made me love my major. I always loved these kind of terms “plain vanilla” buduhduhbuhduhbuhduh, “plain vanilla” always implies terms I could actually understand (inside joke, not really)
Thanks for making the paper you made with Laurent accessible Professor Chinn, It’s kind of you. It’s appreciated,
Two guys I listen to when I need adrum beat Neil Peart and John Bonham, when I need a drum beat on economics I listen to Menzie Chinn and James Hamilton (and cry with emotion when Hamilton is playing guitar at some San Diego Senior;s home, This is how it’s done kids. Still waiting for Hamilton to sing “Terrapin”
If rates remain elevated, i think we do get a recession in the next year. Not sure if it will occur before next election.
In the midst of all the attention to Kharkiv, something very important happened in the black sea, as reported by ISW
https://www.understandingwar.org/backgrounder/russian-offensive-campaign-assessment-may-17-2024
“Ukrainian forces conducted a series of large-scale aerial and naval drone strikes against Russian energy and port infrastructure in Krasnodar Krai and occupied Crimea on the night of May 16 to 17 …..The Ukrainian intelligence sources reportedly stated that the GUR and SBU targeted Black Sea Fleet (BSF) ships in Sevastopol and Novorossiysk. The Russian Ministry of Defense (MoD) claimed on May 17 that Russian forces destroyed 123 drones over Crimea and Krasnodar Krai and 25 unmanned boats in the Black Sea in the past day.[22] A prominent Russian milblogger claimed that Ukrainian forces launched over 140 drones and 20 unmanned boats in the overnight strikes on Sevastopol and Krasnodar Krai.[23] Russian and Ukrainian sources stated that Ukrainian forces struck a port and fuel terminal in Novorossiysk.[24]”
Ukraine has been building up its own defense production and have come up with some very impressive aerial and naval attack drones. So far, they have used them in smaller attacks to take out air defense sites on Crimea, and drive the Russian navy away from the western part of the black sea (to get their agricultural export back to normal).
Russia moved a lot of their ships to Novorossiysk, but it appears to not be far enough away (even as it is pretty much as far away as they can go). It should also be noted that Novorossiysk is a very important oil export site for Russia.
The size of this attack is huge and indicates a very impressive level of self-production of weapons that will be critical for the next 18 month of fighting (before Russia runs out of stored armored vehicles).
Russia has been working to stretch Ukraine’s defensive lines. Longer means thinner. Thinner means easier to overrun or force into retreat.
Ukraine answers by attacking Russian economic assets. Because they can? Or because that will require Russia to change tactics? Either way, it changes the game.
It was originally Russia that decided to shorten the lines when they pulled out of Kharkiv oblast and over to the left bank of the Dnipro river in Kherson oblast. That gave Russia the opportunity to concentrate forces more in the Donbas and Zaporizhzhia oblast.
The rationale for pulling 30,000 Russian troops away from that area to attack in Kharkiv oblast was supposedly to try and secure the Russian city of Belgorod from cross border attacks (and the specific areas of fighting support that as a real goal). It may also put Russia in a better position to lob shells into Kharkiv and terrorize civilians on the cheep.
The idea that this was done to thin out the already stretched Ukrainian lines is a hard sell to me, because they had to pull a lot more of their own troops (30,000) away than Ukraine had to send to strengthen their defenses (and Ukraine is sending reserves rather than pulling from other areas of fighting). The cost to Russia for having distracted those 30,000 soldiers is likely that they lost the opportunity to take Chasiv Jar, and associated high grounds, before the arrival of US weapons. If you want to take advantage of a short window of undersupplied and stretched enemy forces you concentrate your own forces more, not less.
Ukraine is fully aware that Putin doesn’t have a lot more economic (or military) reserves to escalate further. His defense industry and army are fighting over who should get the few available young and capable men. Ukraines attack on oil in not opportunistic, its strategic. It is stretching the Russian supply lines for front line troops, and it is reducing Russian income from exports. Holding the Russian black sea fleet away also ensure that Ukraine can continue to freely export agricultural products out of Odesa.
From ISW report yesterday:
“Geolocated footage published on May 17 shows Russian forces attacking with at least seven armored vehicles near Ivanivske (east of Chasiv Yar).[3] The Ukrainian General Staff noted that Russian forces are widely using armored vehicles in the Chasiv Yar area, and Ukrainian President Volodymyr Zelenksy thanked Ukrainian forces near Chasiv Yar for destroying at least 20 Russian armored vehicles (presumably over the past day).[4] Russian forces have not made notable tactical gains in the Chasiv Yar area since conducting a company-sized mechanized assault on the town’s eastern outskirts on April 4 and have not conducted similar sized-mechanized assaults in the area until May 17”
Large loss of armored vehicles in unsuccessful attacks. Thank God Russia had those 30,000 men with modern equipment up in Kharkiv oblast not down at Chasiv Yar.
Seems to me targeting far behind the lines of contact is similar to strategic bombing as done in WW II by USAAF 8th Air Force and RAF bomber command.
After the war a study was conducted the majority opinion was that bombing strategic assets was effective, there was a minority opinion that the efficiency, that is use of resources was not obvious. J K Galbraith was in that minority.
In the case of Crimea, and Belgorod the effects are limited to the resources available to Ukraine and the limit relation of the target damage to any reduction in value to Russia war making.
Good for headlines but does not impact the line of contact.
A question rises out of recession forecasting based on financial measures: What makes an economy less vulnerable to financial conditions? It’s no good to say “the natural rate has increased”. That’s just a restatement of “less vulnerable”.
Moses recently gave us a catalog of links to household credit measure which don’t look good. Does that make us more vulnerable? Mostly, those bad-looking measures don’t involve mortgage debt, which is important if “housing is the business cycle”. We have had a savings buffer which is now mostly gone. Does that mean we were less vulnerable to financial conditions, but have now returned to vulnerability?
The unemployment rate is rising. Generally, a rising jobless rate portends recession. Even a jobless rate that isn’t falling is a worry:
https://fred.stlouisfed.org/graph/?g=1o2EY
That’s not a financial indicator, but reflects labor market conditions, which drive household finances.