Recession Probability Composite

Overview

This pillar aggregates three historically reliable economic signals into a single, forward-looking recession probability. It provides a clear, data-driven percentage to help you assess macroeconomic risk in financial markets.

What It Does

The composite model synthesizes data from the Treasury yield curve, the Conference Board's Leading Economic Index (LEI), and the Sahm Rule. It continuously monitors these distinct indicators, which measure financial conditions, business cycle momentum, and labor market health. The pillar then weights each signal based on its historical predictive power to generate a unified recession probability score for the next 12 months.

Why It Matters

Recessions have a profound impact on nearly every asset class, from equities to crypto. This pillar cuts through market noise and sentiment by providing a quantitative measure of recession risk. This allows traders to anticipate major market shifts and adjust their positions before a downturn is officially declared.

How It Works

First, the pillar ingests the latest data for the 10-year minus 3-month Treasury yield spread, the LEI's six-month percentage change, and the Sahm Rule's trigger status. Each indicator is then normalized on a scale to measure its signal strength. Finally, these normalized scores are combined using a weighted average formula to produce the final recession probability percentage.

Methodology

The composite score is a weighted average: (40% * Normalized Yield Curve Inversion) + (40% * Normalized LEI 6-month % change) + (20% * Sahm Rule binary status). The yield curve is normalized where a -0.5% spread equals a 100% signal. The LEI is normalized where a -4% 6-month change equals a 100% signal. The Sahm Rule is a binary 0 or 1, triggered when the 3-month unemployment average is 0.5 percentage points above its 12-month low.

Edge & Advantage

It combines slow and fast-moving indicators into one cohesive signal, offering a more robust and timely warning than any single indicator can provide alone.

Key Indicators

• Yield Curve Slope (10Y-3M)

  high

  The spread between 10-year and 3-month Treasury yields; an inversion is a classic recession predictor.

• Conference Board LEI (6-Month % Change)

  high

  A composite index designed to signal peaks and troughs in the business cycle.

• Sahm Rule Status

  medium

  A binary indicator that signals a recession when the 3-month average unemployment rate rises significantly.

Data Sources

• U.S. Department of the Treasury

  Provides daily Treasury yield curve rates.

• The Conference Board

  Publishes the monthly Leading Economic Index (LEI) for the U.S.

• FRED (Federal Reserve Economic Data)

  Hosts the Sahm Rule Recession Indicator and underlying unemployment data.

Example Questions This Pillar Answers

• → Will the NBER declare a U.S. recession has started by Q4 2025?
• → Will U.S. GDP growth be negative for two consecutive quarters before 2026?
• → Will the Federal Reserve cut interest rates in the next 6 months?

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