US recession probability: 25% next 6 months - Wells Fargo

US recession probability: 25% next 6 months - Wells Fargo

28 March 2016, 20:56
Vasilii Apostolidi
According to analysts from Wells Fargo, the probability of a recession in the US, based on their preferred modes is about 25% over the next six months, the highest since the Great recession era. 

“Recent market volatility and data from the factory sector raise the question: Is the U.S. economy headed for a recession? Based on our preferred model, the chance of recession is about 25 percent over the next six months.”

“With two months of data for the current quarter, our preferred recession model remains elevated relative to the past few years. The Probit model we use to predict the chances of a recession estimates (using a handful of predictors) the probability of a recession during the next six months. The model utilizes the Leading Economic Index, the S&P 500 index and the Chicago-PMI employment index as predictors. Our model has served us well; it started predicting (in real-time) a significantly higher probability of recession back in 2007 (58 percent chance of a recession in Q3 2007). In addition, we never joined the “double-dip” camp back in 2010-2012, largely because our Probit model did not indicate a high-likelihood of recession during that time period.”

“Using the most recent data (through February 2016), our model suggests an elevated probability of a U.S. recession during the next six months (about 25 percent).”

“The reason for the elevated probability is that the trend for the predictors, such as the
S&P 500 and the LEI, has been weak the past few months. Clearly, the probability is well below the threshold of above 50 percent for a recession call, but it is the highest reading in the post-Great Recession era.”

“At present, we are not calling for a recession within the next six months. However, given that the recession probabilities based on our preferred model and average of all models are somewhat elevated, it is not wise to entirely dismiss recession risk."

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