New York Fed's Model Predicts End of Recession in 2009

According to the New York Fed,"Research beginning in the late 1980s documents the empiricalregularity that the slope of the yield curve is a reliable predictor offuture real economic activity."

On Monday, the New York Fed releasedits latest "Probability of U.S. Recession Predicted by TreasurySpread," with data through February 2009 and its recession probabilityforecast through February 2010 (see chart above, click to enlarge). TheNY Fed's model uses the spread between 10-year and 3-month Treasuryrates (currently at 2.57%) to calculate the probability of a recessionin the United States twelve months ahead (see chart below of theTreasury spread).

The Fed's datashow that the recession probability peaked during the October 2007 toApril 2008 period at around 35-40%, and has been declining since thento less than 10% for December 2008 and January 2009. Looking forwardthrough 2009, the Fed's model shows a recession probability of lessthan 1% on average through the next 12 months, below 1% by the end ofthe year, and only 0.57% by February 2010. The Treasury spread has beenabove 2% for the last 12 months, a pattern consistent with the economicrecoveries after the 1990-1991 and 2001 recessions.

Bottom Line: The New York Fed's Treasury spread model predicts the end of the recession in 2009.