Research Team at Wells Fargo, suggests that the recent economic and financial developments have brought talk of US recession back into the spotlight.
Key Quotes
“Some potential sources of the recession talks are volatility in financial markets, stress in the manufacturing and mining sectors and global factors. For instance, between January 2015 and January 2016, the ISM-Manufacturing index (ISM-M) dropped over 10 percent, industrial production (IP) declined 0.7 percent (including negative growth for 8 of the past 13 months) and the Commodity Research Bureau’s Index (CRB Index) declined over 15 percent.
The S&P 500 index dropped over 5 percent during the same time period. In addition, the index of leading indicators (LEI), one of the most well-known predictors of the near-term state of the U.S. economy, recently reported negative growth for two consecutive months (December 2015 – January 2016), which has only happened one other time (August – September 2011) since the Great Recession.
How can we quantify the risk of a near term recession? The Probit modeling framework is a useful tool to predict the probability of a near term recession. In addition to our official Probit model, which we built back in 2007, we have built seven different Probit models to capture the risk of a recession for the U.S. economy since different models utilize information from different sectors of the economy to estimate the potential risk posed by those sectors. The average probability from all these models represents the potential risk of a recession posed by the major sectors of the economy.
Based on January 2016 data, our official model predicts a 23.5 percent probability of a U.S. recession during the next six months. Different models predict different probabilities, with a range of 76.2 percent (using IP, S&P 500 Index and the CRB index) to 3.6 percent (based on a yield spread model). The average probability from all eight models is 37.3 percent.”
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