Perfect Recession Predictors

Anthony Diercks, Daniel Soques, & Jing Cynthia Wu

Term spreads and foward spreads are frequently used to forecast recessions. However, the most commonly used spreads (e.g., the 10 year - 3 month spread) are imperfect. 

Diercks, Soques, and Wu (2024)  find 83 spreads that have correctly predicted every U.S. recession since 1961 without any false positives.

The Perfect Spreads

The red lines show the time series for each of the 83 perfect spreads since 1961. Gray shading shows NBER recession dates.

Perfect Recession Prediction Index

The blue line shows the fraction of the 83 perfect spreads that were negative in the preceding 12 months.  An index value of 0 implies none of the spreads were negative in the previous12 months, whereas an index value of 1  implies all of the spreads were negative at some point in the previous 12 months. Gray shading shows NBER recession dates and red shading shows the 12-month window prior to the start of a recession.

Broad Recession Prediction Index

Each line shows a fraction of the 1.6 million spreads that were negative for a given prediction window.  Spreads are weighted based on their historical forecast performance. Gray shading shows NBER recession dates and red shading shows the 24-month window prior to the start of a recession.

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The views expressed here do not reflect the views of the Board of Governors of the Federal Reserve System.