Probability of a recession in the US As an investor, it is important to understand there are no guarantees for any event to occur, only probabilities matter and it could help you navigate through turbulent times.
I've decided to investigate the likelihood the US will fall into a recession based on some historical accounts using Fed Funds and the yield curve.
Since going back to 1957, there has been 12 major Fed hiking cycles of which 9 of them have caused recessions. There are 3 years worth noting where a soft landing occurred and this would be 1966, 1984 and 1995. In each of these years, the yield curve did not invert and I'm referring to the 10's and 3 months yield curve. It is fair to say that using bond yields and measuring the spread between the long and short end is the best predictor of an economic downturn we have. Anytime this happens, investors should remain cautious. We are now past 13 months in which the yield curve has remained inverted and yet we still don't have a recession. This has happened only one other time in history and that's the 16 month lag it took for the recession to arrive during the GFC. We have now entered the 14 month and so if the recession does not arrive by February (if it does) then it would have surpassed the longest of lags in recorded history. It doesn't mean we are out of the woods, but that the lags could possibly be longer this time. Who knows?If we use the yield curve as an indicator, then the recession should have happened by now.
The probability that the US enters a recession during this hiking cycle is about 50% using the last rate hike to a Fed pivot as a guideline. That is, out of the last 12 hiking cycles since 1957, 6 times a recession occurred after the Fed's last interest rate hike, 3 times the recession never happened and 5 out of 9 times it did on the condition that a recession occurred. When the Fed cuts interest rates, the recession still occurred 5 out of 12 times and it begins to tilt in favour of a no recession happening. Next year should be very interesting as I think the Fed is halfway there but they still have more work to do.