US Recession Research Articles

What predicts US recessions?

We reassess the in- and out-of-sample predictability of US recessions at horizons of three months to two years ahead for a large number of previously proposed leading indicator variables, using the Treasury term spread as a benchmark. We estimate both univariate and multivariate probit models, and evaluate the relative model performance based on the receiver operating characteristic (ROC) curve. At the three- and six-month-ahead horizons, various alternative predictor variables increase the accuracy of recession forecasts significantly relative to the term spread, with the annual return on the S&P500 index providing the strongest improvement. While the Treasury term spread is more difficult to outperform systematically at longer horizons, manufacturers’ new orders of capital goods and balances in Broker-Dealer margin accounts increase the precision of recession predictions significantly at horizons of more than one year.

Wishful Bias in Predicting US Recessions: Indirect Evidence

There is evidence in the economic literature that professional forecasters are unsuccessful in predicting recessions, but the reasons for these failures are still not clear. Meanwhile, this phenomenon has been little studied on the basis of quarterly estimates for various target horizons. We analysed quarterly consensus forecasts of real GDP growth rates and probabilities of recession taken from the Survey of Professional Forecasters (SPF) conducted by PhilFed and established several stylized facts including: “alarm signals” usually appear only after cyclical peaks; consensus forecasts of recessions for distant target horizons (more than two quarters) have never met except several quarters after the second oil shock; as a rule, pre-recession probabilities of recessions are much less than 50%; the expected durations of recession are less than actual ones; the Mincer-Zarnowitz test with a dummy for recessions reveals that SPF give biased forecasts of real GDP growth rates for almost all target horizons; experts regularly overestimate growth rates during recessions; adding a dummy for recessions significantly increases adjusted R2s; consensus forecasts clearly signal a recession only after a black swan; the majority of experts avoid predicting declines in real GDP before a recession; depth of contraction is even more underestimated for quarters after black swans. None of these stylized facts proves the unwillingness of professional forecasters to predict recessions (especially prolonged ones) in a direct way. However, in our view, together they constitute indirect evidence for the existence of a wishful bias against predicting recessions. If this bias exists, customers of SPF forecasts should take this into account in their decision-making processes.

Forecasting US Recessions with a Large Set of Predictors

In this paper, I use a large set of macroeconomic and financial predictors to forecast US recession periods. I adopt Bayesian methodology with shrinkage in the parameters of the probit model for the binary time series tracking the state of the economy. The in‐sample and out‐of‐sample results show that utilizing a large cross‐section of indicators yields superior US recession forecasts in comparison to a number of parsimonious benchmark models. Moreover, the data‐rich probit model gives similar accuracy to the factor‐based model for the 1‐month‐ahead forecasts, while it provides superior performance for 1‐year‐ahead predictions. Finally, in a pseudo‐real‐time application for the Great Recession, I find that the large probit model with shrinkage is able to pick up the recession signals in a timely fashion and does well in comparison to the more parsimonious specification and to nonparametric alternatives. Copyright © 2016 John Wiley & Sons, Ltd.

Gender differences in exogenous entrepreneurial motivation factors in the context of the post-2008 US recession business environment

In the last decade, growth in female-owned entrepreneurial ventures in the USA has accelerated. Despite this, there is sparse research that examines whether exogenous entrepreneurial motivations of females are materially different from those of males. This paper adds to the extant literature by examining this topic in the context of the post-2008 US economic recession. Specifically, this paper examines the motivation factors of: 1) work and family balance flexibility; 2) lack of corporate opportunities; 3) career aspirations. Findings suggest that these exogenous motivation factors are stronger motivators for female entrepreneurs than for male entrepreneurs.

Predicting US recessions with stock market illiquidity

AbstractIn this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by (Amihud, Y. 2002. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.”

Forecasting US recessions with macro factors

Dynamic factors estimated from panels of macroeconomic indicators are used to predict future recessions using probit models. Three factors are considered: a bond and exchange rates factor, a stock market factor and a real activity factor. Three results emerge. First, models that use only financial indicators exhibit a large deterioration in fit after 2005. Second, models that use factors yield better fit than models that use indicators directly. Out-of-sample forecasting exercises confirm these results for 3-, 6- and 12-month horizons using both ex-post revised data and real-time data. Third, results show evidence that data revisions affect factors less than individual indicators.

Children's Insurance Coverage and Crowd-Out Through the Recession: Lessons From Ohio.

We estimated changes in children's insurance status (publicly insured, privately insured, or uninsured) and crowd-out rates during the 2007 to 2009 US recession in Ohio. We conducted an estimate of insurance coverage from statewide, randomized telephone surveys in 2004, 2008, 2010, and 2012. We estimated crowd-out by using regression discontinuity. From 2004 to 2012, private insurance rates dropped from 67% to 55% and public rates grew from 28% to 40%, with no change in the uninsured rate for children. Despite a 12.0% decline in private coverage and a corresponding 12.6% increase in public coverage, we found no evidence that crowd-out increased during this period. Children, particularly those with household incomes lower than 400% of the federal poverty level, were enrolled increasingly in public insurance rather than private coverage. Near the Medicaid eligibility threshold, this is not from an increase in crowd-out. An alternative explanation for the increase in public coverage would be the decline in incomes for households with children.

Dynamic co-movements between economic policy uncertainty and housing market returns

We examine dynamic correlations between housing market returns and economic policy uncertainty in the United States. Our findings suggest that correlations are time-varying and sensitive to economic fundamentals and US recessions.

Predicting US Recessions with Stock Market Illiquidity

In this paper, we investigate the dynamic link between recessions and stock market liquidity by examining the predictive content of illiquidity for US recessions. After controlling for other commonly featured recession predictors such as term spreads and credit spreads, we find that the illiquidity measure proposed by Amihud (2002) has strong power in predicting recessions. Moreover, the predictability of the illiquidity measure of small firms is found to be stronger than that of large firms, which supports the hypothesis of flight to liquidity.''

Cross-Border Asset Holdings and Comovements in Sovereign Bond Markets

We analyze the importance of different types of asset holdings for the interdependence of the yield curves in the EMU using a spatial VAR model. We find that the cross-border holdings of long-term debt and bank lending are important for the interdependence. Our analysis of cross-sectional dispersion in sovereign-CDS-premium term structure shows that the differential in sovereign creditworthiness in the EMU is a main driver of the yield-curve divergence after 2008. The degree to which EMU countries’ yield-curve slopes depend on the US slope decreases in the recent US recession, reflecting expectations during this period about future divergence of the US and EMU economies.

Cointegration of Stock Markets

This article uses daily stock prices during the period 1997–2013 to empirically investigate the existence of stock market cointegration between Thailand and its 11 major trading markets, including Hong Kong, Japan, the New York Stock Exchange (NYSE), the National Association of Securities Dealer Automated Quotation (NASDAQ), London, Australia, Philippines, Singapore, Korea, Indonesia and Malaysia. After accounting for structural breaks of the series and salient economic events (for example, the Asian Financial Crisis of 1997 and the US recession in middle of 2007), the Engle–Granger test suggests that the stock price indices of Thailand exhibit a weak long-run relationship with the other selected markets, which in turn provides investors profitable opportunities from portfolio diversification.

Predicting US Recessions: Does a Wishful Bias Exist?

There is evidence in the economic literature that near cyclical peaks an optimistic bias exists in private expert forecasts of real GDP growth rates. Other evidence concerns differences in the accuracy of GDP forecasts made during expansions and those made during contractions. It has also been hypothesized that a wishful bias may hamper the ability to recognize the beginning of a recession in real-time. We tested consensus forecasts of quarterly GDP growth rates taken from SPFs conducted by PhilFed and found that they may be seen as unbiased only for time horizons j=0,1,2; for greater horizons they are over-optimistic. This over-optimism may also be observed for (j=1, 2) for forecasts made at peaks (at these moments the consensus usually points only to a slowdown of the economy but not to a contraction). Lastly, over-optimism may be observed for nowcasts (j=0) during cyclical contractions, including the first two quarters of a recession (in these cases the reality is usually worse than expected). Taken together, all these facts mean that some aversion to predicting US recessions exists. There are two possible reasons for this: a) experts rely too heavily on extrapolations (then changes in medium-long tendencies would be missed in real time); b) there is a wishful bias in forecasts against predicting recessions (this reluctance may be rooted in psychological factors). We give some arguments in favor of the thesis that the second factor is more important.

Sector size, technical change and stability in the USA (1957-2006): a Schumpeterian approach

Purpose– The purpose of this paper is to investigate two famous postulates of the Schumpeterian doctrine and its implications for the US economy.Design/methodology/approach– Analytically, the authors investigate whether sector size matters for sectoral: technological change and stability, as expressed through the relevant quantitative measures and variables. To this end, the authors test a number of relevant models that express the various forms of this relationship. More precisely, the authors use panel data for the 14 main sectors of economic activity in the USA over the period 1957-2006, just before the first signs of the US and global recession made their appearance.Findings– The results seem to be in line with the Schumpeterian postulate that market size matters for technological change and economic stability, for the US economy (1957-2006). Clearly, further research would be of great interest.Originality/value– This work contributes to the literature in the following ways: first, it provides an extensive review of the literature on the subject and adopts two relevant methodological approaches. Second, based on these quantitative approaches, the paper offers a complete investigation of two famous postulates of the Schumpeterian theory for the US economy, and it is the first, to the best of the authors’ knowledge, to do so by sector of economic activity, in a panel data framework. Third, the paper uses a wide data set (1957-2006) to examine the US economy up until the first signs of the US and global economic recession made their appearance.

Economic policy uncertainty, financial markets and probability of US recessions

We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.

Macroeconomic Effects of Precautionary Demand for Oil

SummaryWe evaluate the macroeconomic effects of shocks specific to the oil market, which mainly reflect fluctuations in precautionary demand for oil driven by uncertainty about future supplies. A two‐stage identification procedure is used. First, daily changes in the futures–spot price spread proxy for precautionary demand shocks and the path of oil prices is estimated. This information is then exploited to restrict the oil price response in a vector autoregression. Impulse responses suggest that such shocks reduce output and raise prices. Historical decomposition shows that they contributed significantly to the US recessions in the 1990s and in the early 2000s, but not to the most recent slump. Copyright © 2014 John Wiley & Sons, Ltd.

Forecasting US recessions: The role of sentiment

We study the role of sentiment variables as predictors for US recessions. We combine sentiment variables with either classical recession predictors or common factors based on a large panel of macroeconomic and financial variables. Sentiment variables hold vast predictive power for US recessions in excess of both the classical recession predictors and the common factors. The strong importance of the sentiment variables is documented both in-sample and out-of-sample.

A wavelet-based evaluation of time-varying long memory of equity markets: A paradigm in crisis

This study, using wavelet-based method investigates the dynamics of long memory in the returns and volatility of equity markets. In the sample of five developed and five emerging markets we find that the daily return series from January 1988 to June 2013 may be considered as a mix of weak long memory and mean-reverting processes. In the case of volatility in the returns, there is evidence of long memory, which is stronger in emerging markets than in developed markets. We find that although the long memory parameter may vary during crisis periods (1997 Asian financial crisis, 2001 US recession and 2008 subprime crisis) the direction of change may not be consistent across all equity markets. The degree of return predictability is likely to diminish during crisis periods. Robustness of the results is checked with de-trended fluctuation analysis approach.

The Inverted Yield Curve and the Components of GDP

When 3-month Treasury rates are greater than 10 -year Treasury rates an inverted yield curve occurs. When this state is reached some argue that a recession is on the horizon, typically 6 months to a year down the road. Here, I reframe the question of whether inverted yield curves predict recessions in the US and ask what an inverted yield curve predicts. Using a Probit model I find that when 10-year US Treasury bonds yield less than 3-month US Treasury bills, a US recession, while probable, is not certain. Moreover, I find that indeed the strength of this indicator has weakened over the last 20 years. However, my findings do not suggest that an inverted yield curve provides no information about the future. In fact, I find that an inverted yield curve strongly predicts movements in the consumer durables and fixed private investment series of US GDP.

Price-Level Targeting: A Post-Mortem?

Recent research has shown that monetary policy based on price-level targeting has several advantages over the traditional inflation targeting method, particularly in times of economic distress. Although several central banks have been coping with the aftershocks of the 2008 financial crisis for prolonged periods, none has adopted price-level targeting. This Commentary reviews some of the reasons for this in the Canadian and American contexts. The relative mildness of Canada’s 2008-2009 recession convinced the Bank of Canada that inflation-targeting can work in troubled as well as tranquil times. Meanwhile, the severity of the US recession led the Federal Reserve to explore several types of unconventional monetary policies, but not price-level targeting. The latter requires a commitment to offset the effects of unexpected inflation on the price level and makes monetary policy history-dependent. The Fed prefers to exercise discretion, and inflation targeting allows central banks to ignore past inflation shocks and engage in fine-tuning of the business cycle. The Bank of Canada shares the Fed’s predilection for discretion in this regard.

Recession Prediction Using Yield Curve and Stock Market Liquidity Deviation Measures

This article extends the benchmark Estrella and Hardouvelis term spread approach to recession forecasting by including the stock market macro liquidity deviation factor. We use a probit framework to predict recessions, as defined by the NBER between 1959Q1 and 2011Q4. We find that combining the yield curve parameter with the stock market liquidity deviation significantly improves our ability to predict the onset of a US recession, based both on in-sample and out-of-sample tests. In addition, changes in stock market depth further increase the accuracy of the model. We suggest that economic forecasters and those charged with conducting economic stabilization policy more generally would benefit from monitoring not only the yield curve but also stock market depth and liquidity, and their deviation from one another.