US Economy Alarmed: New York Fed Indicates Highest Likelihood Of Recession In Over Four Decades

The likelihood of the U.S. entering a recession within the next year rose to more than 70% in May, the highest level seen since 1982, according to the Federal Reserve Bank of New York.

The New York Fed's recession probability model is based on the U.S. Treasury yield curve slope, specifically the difference between the yields on three-month bills and 10-year Treasury bonds. 

What You Need to Know About Recession Risks in the U.S., The Yield Curve and The Stock Market: The probabilities of a recession in the year ahead have risen from nearly 5% in January 2023 to 70.85% in May 2023, the highest level since April 1982, according to the Federal Reserve Bank of New York.

• The gauge is derived by the sharp inversion of the U.S. Treasury yield curve, as the 10-year yield fell to over 1.7 percentage points lower than the three-month yield, marking the most negative spread since the 1980s.
• The 10-year versus three-month yield inversion has been a reliable recession predictor in the past, having successfully predicted each of the previous eight U.S. economic downturns.
• Concerns about the current state of the economy, high-interest rates, inflation and the growing stress associated with the debt ceiling stalemate have further inverted the U.S. Treasury yield curve in recent weeks, increasing the likelihood of a recession.
• The services sector, which constitutes about 80% of the U.S. gross domestic product, recently showed some signs of a slowdown, as indicated by a lower-than-expected ISM Services PMI in May.
• Despite the spike in U.S. recession probabilities as implied by the New York Fed's Treasury spread model, the U.S. stock market, as gauged by the SPDR S&P 500 ETF Trust (ARCA: SPY), rose to the highest levels since August 2022, climbing over 20% since October 2022 lows. 

Chart: The New York Fed's Prediction Of A U.S. Recession Within A Year

Some elements of the story were previously reported by Benzinga and the story has been updated.

Photo: Shutterstock