As the economy demonstrates resilience, both retail investors and institutions seem to gradually accepting the possibility of a "soft landing." We have compiled 7 commonly used recession indicators for users to independently assess the probability of an economic soft landing. All of these charts will be continuously updated on the MacroMicro website.
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Seven Commonly Used Recession Indicators
Observing the US Atlanta Fed GDP Nowcast, the forecast for Q3 2023 GDP has been consistently raised to 5.9%. During the press conference following the July FOMC meeting, Chairman Powell also indicated that the Fed's staff economists no longer forecast a recession. Here, we have identified commonly used indicators to provide investors with a basis for assessing whether a recession is imminent and determining the economic outlook.
Is A Soft Landing About to Be Achieved? Key Recession Indicators to Watch
Effectively utilizing these 7 charts will enable you to develop a more thorough comprehension of the prevailing economic conditions. Instead of merely receiving information from diverse news outlets passively, you will evolve into an intelligent investor empowered to engage in autonomous analysis grounded in data. All of these charts will receive consistent updates on the MacroMicro website, and we also offer the "BookMarks" feature to help you create a personalized Watchlist tailored to your preferences.
1. US Philly Fed Recession Probability Index
The Federal Reserve Bank of Philadelphia estimates the probabilities of negative quarterly GDP growth rates for the current quarter and the next four quarters in the United States based on the results of the Survey of Professional Forecasters (SPF). The probability of recession for the next quarter is also referred to as the "Anxious Index," which accurately predicted every economic recession identified by the National Bureau of Economic Research (NBER) since 1970. Taking the example of the recession probability for Q4 2008, current quarter (Q) represents the likelihood of a negative SAAR in GDP for Q4 2008. Following this pattern, next quarter (Q+1) represents Q1 2009, and four quarters ahead (Q+4) represents Q4 2009.
The latest Q3 SPF results show that the probability of recession for the current quarter, next quarter, and four quarters ahead are 21.68%, 34.38%, and 34.41%, respectively. It appears that the probability of recession continues to decrease.
2. US FED Excess Bond Premium Recession Probability
Recession Risk based on the Excess Bond Premium is a recession model introduced by Federal Reserve in 2016, which is a financial indicator originally introduced by Gilchrist and Zakrajšek (2012). The EBP is a component of corporate bond credit spreads that is not solely driven by expected default risk, which is an effective indicator for evaluating investor sentiment or risk preference in the corporate bond market. The higher the EBP, the higher the risk in the bond market. The current EBP Recession Probability is 21.72%, which has seen a slight increase this year, but still hasn't reached the levels observed during crisis periods.
3. US Sahm Rule Recession Indicator
Claudia Sahm, an economist of the Federal Reserve, proposed an approach to identify the onset of a recession. Her observations suggest that if the 3-month moving average of unemployment rate exceeds 0.5% compared to the previous year's low, the economy is in a recession or will enter one soon. This condition has been met in all past recessionary periods, leading to the naming of this indicator as the Sahm Rule Recession Indicator. Due to the historically low levels of unemployment rate in US, the Sahm Rule Recession Indicator is not signaling a recession.
