What's the Chance of a Recession in US?

The latest business update from Fidelity Investment states that U.S. is in the late-cycle expansion phase, with solid near-term momentum but a high probability of greater slowing ahead.

The diagram above is a hypothetical illustration of the business cycle, the pattern of cyclical fluctuations in an economy over a few years that can influence asset returns over an intermediate-term horizon. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. A growth recession is a significant decline in activity relative to a country’s long-term economic potential. Source: Fidelity Investments (AART), as of 2/6/2023.

Fed Fund Rate & Recession

T10Y3M & Recession

From 1982 till now, there are 5 recessions in total and each recession occurred after fed fund rate dropping and negative T10Y3M.

It sounds like Fed fund rate and T10Y3M can help us to predict the recession, we select them as the features to build our model.

Recession Prediction

Model:XGBoost

Time Range: 4 Jan 1982 – 1 Aug 2023

Time Frequency: Daily

Data:

· FedRate (Difference of Fed Fund Rate)

· T10Y3M (10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity)

Data Source: https://fred.stlouisfed.org/

XGBoost model allows us to predict a recession with probability.

Here is the test set result, above the red dashed line, there is likely a recession occurred.

The trained model is doing well as it would accurately locate the recession in 2020. We can use this model further to predict the upcoming probability of recession with given fed fund rate and T10Y3M.

The model also tells us fed fund rate contribute more than T10Y3M in predicting recession, in other words, the change of fed fund rate is a more important factor to recession.