September 2010 Report
September 27th, 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).
Figure 1. Recession Probabilities for the US Economy
Figure 1 shows recession probability estimates over the last ten years up to August 2010. These are based on the CEI and LEI vintages released on September 23rd.
The CEI was unchanged in August, remaining at 101.3, following a 0.1 percent increase in July, and no change in June. The LEI increased 0.3 percent in August to 110.2, following a 0.1 percent increase in July, and a 0.2 percent decline in June.
For the eleventh subsequent month, both the coincident recession probability and the leading recession probability remained constant at 0.0 percent. On September 23rd, the business cycle dating committee of the National Bureau of Economic Research (NBER) has determined that a trough in business activity occurred in the US economy in June 2009. This allows us to conclude that both the date of the recent business cycle peak (December 2007) and the trough (June 2009) were correctly signalled by the recession probabilities. The peak was first signalled in May 2008 and the trough in July 2009.
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.
Figure 2a. Recessions as determined by the NBER
Figure 2b. Recession Probabilities for the CEI
Figure 2c. Recession Probabilities for the LEI
Time series plots of the September 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.
Figure 3a. Time Series Plots of the September 2010 Vintages: Levels
Source: The Conference Board
Figure 3b. Time Series Plots of the September 2010 Vintages: Monthly Growth Rates
Source: The Conference Board
