The odds peaked using a standard spread model.
Here is an updated assessment of recession probabilities (for the next 12 months), including data through June 2024, and assuming no recession has occurred by July 2024.
Figure 1: Probit estimated recession probabilities for the next 12 months, using the 10-year-3-month spread and the 3-month rate (blue), the 10-year-3-month spread, the 3-month rate, and the debt service ratio for the nonfinancial private sector (tan), and the 10-year-3-month spread, the 3-month rate, the debt service ratio for the nonfinancial private sector, and the foreign rate spread (green). Sample for estimation 1985M03-2024M06. NBER defined the peak-to-trough recession dates as gray. Source: Author’s calculations and NBER.
The pseudo-R2 for the augmented specification of the debt service ratio, and the one including the foreign rate spread as well as the debt service ratio, is 0.56 versus 0.58.
The probabilities forecast for July 2024 vary from 60% (term spread, short rate) to 20% (term spread, short rate, debt service ratio).
The declining probabilities of the debt service increase models are based on the declining pace of increase, which I have dynamically extrapolated for the first six months of 2024.
Figure 2: Debt service ratios for the non-financial private sector (black), dynamic forecast (tan), both in %. 2024Q1-Q2 is estimated using interest rates (see here). The NBER has defined the peak-to-trough recession dates in gray. Source: BIS, Dora Fan Xia, NBER and author’s calculations.
