January 2010 Report

January 25th, 2010

 

On this website we publish our recession probability estimates and forecasts for the US economy obtained using the methodology in Paap et al. (2009), as described below. The website is updated every month, shortly after the release of The Conference Board's Coincident Economic Index (CEI) and Leading Economic Index (LEI).

 

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Figure 1. Recession Probabilities for the US Economy

 

Figure 1 shows recession probability estimates over the last ten years up to December 2009. These are based on the CEI and LEI vintages released on January 21st.

 

The CEI rose 0.1 percent in December, following a 0.1 percent increase in both November and October. The LEI increased 1.1 percent, following a 1.0 percent gain in November, and a 0.3 percent rise in October.

 

For the third subsequent month, both the coincident recession probability and the leading recession probability remained constant at 0.0 percent.

 

The probabilities are obtained from a Markov-Switching model for monthly growth rates for the CEI and LEI. The model assumes that the two variables share the same cycle, where the LEI leads the CEI with lead times at peaks and troughs allowed to be different. The model therefore produces both a 'coincident' and a 'leading' recession probability.


Figure 2 shows coincident and leading recession probabilities since January 1959. The blue and green shaded areas indicate months that are part of periods during which this probability exceeds 0.5 for at least six consecutive months. This corresponds with the popular rule of thumb saying that the economy is in recession whenever economic growth is negative during two consecutive quarters. The recession periods as determined by the NBER are also shown for comparison.

 

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Figure 2a. Recessions as determined by the NBER

 

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Figure 2b. Recession Probabilities for the CEI

 

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Figure 2c. Recession Probabilities for the LEI


 

Time series plots of the January 2010 vintages

Figure 3 displays the time series plots of the log levels and monthly growth rates of the LEI and CEI, together with the recession periods as determined by the NBER, indicated by the yellow shaded areas. The leading index has a similar cyclical pattern as the coincident index, but with turning points clearly occurring earlier, and recessions lasting considerably longer.

 

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Figure 3a. Time Series Plots of the January 2010 Vintages: Levels
Source: The Conference Board

 

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Figure 3b. Time Series Plots of the January 2010 Vintages: Monthly Growth Rates
Source: The Conference Board