The Yield Spread and the Odds of Recession « Donald Marron: [H]ow likely is a return to recession? Researchers at the San Francisco Fed [Travis J. Berge and Òscar Jordà] took a crack at this question a few weeks ago. Their answer? It depends.
When they used a traditional model based on the leading economic indicators, the probability of a second dip turned out to be about 25% over the next two years (the blue line). When they dropped one indicator from their model, that probability doubled to about 50% (the red line).
That important indicator is the yield spread–the difference between the 10-year Treasury interest rate and federal funds rate. In recent decades, the yield spread has done a terrific job at anticipating recessions. When the federal funds rate has risen above the 10-year rate, the economy has invariably fallen into recession.... [T]he relative steepness of today’s yield curve... suggests, by itself, that renewed recession is unlikely, despite recent weak economic data. On the other hand, there are reasons to believe that this time things are different (usually a scary phrase)...