Many economists as well as market implied gauges are saying the U.S. economy is likely to enter a recession. But there’s one gauge almost as high as it possibly can be.
The model uses the difference between the 3-month forward Treasury rate beginning 18 months ahead and the 3-month Treasury bill to estimate the probability of a recession in the United States 12 months ahead.
It’s based on the methodology outlined in the Federal Reserve Board’s Finance and Economics Discussion Series Note entitled “(Don’t Fear) The Yield Curve” and elaborated on in a working paper titled “The Near-Term Forward Yield Spread as a Leading Indicator: A Less Distorted Mirror” by Eric C. Engstrom and Steven A. Sharpe.
And — it’s high. As calculated by Haver Analytics, the recession probability for April was 99.3%.
There have been a few times when that indicator was in excess of 99%, way back in the 1970s and in the early 1980s. Recessions did follow.
David Rosenberg, founder and president of Rosenberg Research and the long-time Merrill Lynch strategist who drew attention to this gauge, said on Wednesday that the latest reading of the Empire State index is the final nail in the coffin.
His big picture theme is that safe-havens such as bonds and gold will remain in vogue, and growth stocks will be supported by the move lower in long-term interest rates. “A banking sector credit crunch has arrived on time in the aftermath of the most aggressive Fed tightening cycle since 1981, and into a deeply inverted yield curve. Either lengthen your time horizons or have a stash of cash on hand,” he says.
