Recession Probability: Recession to Persist for Next Six Months

Our recession model puts the latest probability of recession at 94 percent. There is certainly overwhelming evidence that the domestic economy continues in recession mode as both consumer spending and business investment have weakened. Key model inputs such as leading indicators and employment signal continued problems ahead.

Recession Probability Remains Very High

Unfortunately the probability of recession for the next six months remains high. As evidenced in the top graph, the latest probability calculation is consistent with prior recessionary periods. Our model takes a look at a very broad set of predictors and these indicators suggest the current recession will likely continue through at least the first quarter of next year.

Economic problems began to show up in our model in the fourth quarter of last year as the recession probability rose sharply to 75 percent, and since then the probability has remained high. While the official recession call will come from the National Bureau of Economic Research sometime next year, for decision-makers the operational guideline is a recession outlook today.

Leading Indicators: Pattern Consistent with Prior Recessions

Over the last year the leading indicator series (middle graph) has dropped into negative territory in a pattern reminiscent of 1990/91 and 2001 recession periods. Over the last three months we have seen deterioration in leading indicator components of unemployment claims, building permits and stock prices. As expected, the building permits component continues to be weak as it has been over the last two years.

Over the last three months, the coincident indicator has declined at a 3.3 percent annual rate. The coincident indicator hints at where we are now. The weakness in the index reflects the sustained weakness in the underlying indicators of employment and industrial production that we have witnessed in recent months. Our outlook is that this weakness will continue for the rest of the year and through the first quarter of next year.

Employment Weakness: Core Issue for the Consumer

Over the last three months the performance of the Chicago Purchasing Managers' Survey employment component has weakened markedly (bottom graph). This weakness is consistent with the decline in employment we have seen this year.

Unfortunately, employment declines are consistent with weakness in consumer incomes and thereby weaker consumer spending. Our outlook is for declines in real consumer spending in the second half of this year. This will be particularly hard on consumer discretionary items.

Weakness in consumer spending and housing dominates the attitude about the overall economy and the sense of recessionary gloom. In recent months the credit issues have magnified the pessimism, and the outlook for the economy is now consistent with a high probability of recession.

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