Recession Probability
In short
Model-estimated probability of a US recession in the next 12 months
Economists combine yield curve data, unemployment trends, and other indicators to estimate the probability of recession. Above 30% is a warning; above 50% suggests recession is more likely than not.
Recession probability models (like the NY Fed's yield-curve-based model) combine leading economic indicators to generate a probability estimate. They use yield curve slope, credit spreads, PMI, and unemployment trends. No model is perfect but probabilities above 40% warrant defensive positioning.
Thresholds
- < 15
- Low risk
- 15-30
- Elevated watch
- 30-50
- High risk — consider defensive tilt
- > 50
- Recession likely
Related concepts
- Yield Curve — Normally, long-term bonds yield more than short-term ones (upward sloping). When short-term yields exceed long-term (inverted curve), it's historically predicted every US recession in the past 50 years. Investors call this the most reliable recession indicator.
- GDP Growth — GDP growth measures how much the economy grew (or shrank). Think of it as the economy's report card. Above 2-3% is healthy. Two consecutive negative quarters = recession. Recessions hurt stocks but eventually lead to recoveries.
- Unemployment Rate — The unemployment rate shows what percentage of people who want to work can't find a job. Below 5% is considered healthy. Very low unemployment (below 3.5%) can actually cause inflation as companies compete for workers.
- Credit Spread — Credit spreads measure how much extra yield investors demand to hold corporate bonds instead of safe government bonds. Widening spreads mean investors are worried about defaults — a warning sign for stocks too.