In 2019, Fed economists david miller A comprehensive assessment of the predictive power of term spreads for recessions (No single best predictor of recession). For the period 1984-2018, he found the following:
Figure 2: AUROC sample 1984 – 2018 from Miller (2019).
See this article for a discussion of AUROC (Area Under the Receiver Operating Characteristic Curve) Jim H.
Here’s what those spreads looked like as of Friday (colors match the image above?):
figure 1: 1Y Fed Funds Spread (Yellow Green), 5Y Fed Funds Spread (Red), 10Y Fed Funds Spread (Dark Teal), 10Y-1Y (Sky Blue), and 3Y-2 Years (purple), all are percentages. The dashed red line indicates Russia’s expanded invasion of Ukraine. Source: Treasury via FRED, and authors’ calculations.
The 1-year fed funds spread (1-2 months) has not turned negative, although the 5-year fed funds spread (4-9 months) has Last post on this topic a month ago. The 10-year fed funds spread (10-19 months) did close in negative territory on Nov. 10, suggesting a recession will occur sometime between Sept. 2023 and Aug. 2024. Year 10 to Year 1 is also negative on July 12, so 20 to 23 months ahead (February 2024 to May 2024).
Note that these are the maximum AUROC for the simple term propagation model.They do not include foreign term spreads (as suggested Ahmed and Chinn, 2022), nor factors based on classified sector dividend yields (such as Chatelais, Stalla-Bourdillon and Chinn, 2022).
