Forecasting US recessions: The role of economic uncertainty

Abstract

This letter highlights the role of macroeconomic and financial uncertainty in predicting US recessions. In-sample forecasts using probit models indicate that the two variables are the best predictors of recessions at short horizons. Macroeconomic uncertainty has the highest predictive power up to 7 months ahead and becomes the second best predictor – after the yield curve slope – at longer horizons. Using data up to end-2018, out-of-sample forecasts show that uncertainty has significantly contributed to lower the probability of a recession in 2019, which indeed did not occur.