The GDP-Based Recession Indicator Index is a brainchild of analysts Marcelle Chauvet and James Hamilton. Hosted and documented on the Federal Reserve Economic Data (FRED) platform maintained by the Federal Reserve Bank of St. Louis, this index provides a quarterly update on the probability of the U.S. economy being in a recession.
Zero indication of Recession ❌
The background
This index observer of the nation’s economic landscape, specifically scrutinising Gross Domestic Product (GDP) data, a comprehensive measure of the total value of goods and services produced within the country. By analysing the recent trends in GDP data, it discerns the economic trajectory, identifying whether the economy is on an upward expansionary path or a downward recessionary spiral. Utilising a precise mathematical model, it calculates the probability of a recession, rendering a quantitative assessment of economic health.
Unlike the NBER business cycle dates, which rely on a subjective evaluation of various indicators – that might not be unveiled until several years post-event, – this index is purely mechanistic, anchored solely on the contemporaneous GDP data, and is updated every quarter. The index’s value for a given quarter is computed based on the GDP data available up to one quarter post that date, as reported at that time, thus mitigating the delay typically associated with data revisions and the challenges inherent in pinpointing the precise phase of the business cycle. Once the index value for a quarter is ascertained, it remains immutable, ensuring a consistent historical record for subsequent analysis and interpretation.
When the calculated probability surpasses a threshold of 67%, it flags a likely onset of a recession, serving as a crucial indicator for policymakers and economists. Conversely, a dip below a 33% probability threshold signals the likely cessation of a recession, indicating a potential return to economic stability or growth. Through this nuanced analysis, the GDP-Based Recession Indicator Index provides a structured, data-driven lens to monitor and interpret the economic pulses, facilitating informed decision-making in response to the evolving economic scenarios.
The metrics
| Indicator | Current Status | Recession? |
| Index rises above 67% | Currently miles away from 67% and not increasing | ❌ |
| Index moves back below 33% | – | ❌ |
The narrative
No real narrative here. This is a binary snapshot rather than a sequence of events that we might track in the lead up to a recession.
When the economy is healthy, there’s growth, and businesses are generally producing more goods and services – this is reflected in rising GDP figures. Conversely, during a recession, economic activity contracts, and GDP figures decline. There’s some maths behind the indicator, involving nonparametric kernel methods to estimate the density of GDP growth during economic phases, then applying Bayes’ Law to calculate the probability of recession given observed GDP growth values. We don’t need to know that though, we just need to look out for 67%.
Looking back at previous recessions, the time it take to get from single digit percentage to above the recession threshold is never less than 2 Quarters, and at most 6 Quarters. That means we have a half a year’s warning from the lows (which might be now) until we are in a recession.
Where are we now?
We are currently a long way from 67%, currently in single digits.
Given our current position, we can assume no recession in at least Q2 2024, likely longer.
Credit
All credit for the development and maintenance of the GDP-Based Recession Indicator Index is duly accorded to Marcelle Chauvet and James Hamilton for their insightful analysis, and the Federal Reserve Bank of St. Louis for hosting and documenting the index on the FRED platform.
More of Marcelle: https://sites.google.com/site/marcellechauvet/home
James Hamilton: https://econweb.ucsd.edu/~jhamilto/