NY Fed Model: No Chance of Recession in 2010, Economic Recovery Is Probably Already Underway

A few days ago, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through July 2009, and the Fed's recession probability forecast through July 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (3.38% spread in June, the second highest since May 2004) to calculate the probability of a recession in the United States twelve months ahead.

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month (see chart above and chart below). For July 2009, the recession probability is only 0.97% and by July 2010 the recession probability is only .09%, the second lowest level since May 2005.

Further, the Treasury spread has been above 2% for the last 17 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above). The pattern of the recession probability index so far this year (going below double-digits and declining monthly) is very similar to the pattern starting in March 2002 that signalled the end of the 2001 recession (see chart below).