Recession Probability Model

Overview

This pillar synthesizes critical financial signals, primarily yield curve inversions and key economic indicators, to calculate the probability of a recession. It provides a data-driven forecast for major economic shifts, helping users price risk in financial markets.

What It Does

The model systematically tracks the spread between short-term and long-term government bond yields, a historically reliable recession predictor. It combines this with other forward-looking data like the Sahm Rule, which tracks unemployment. By weighting these inputs based on their historical predictive power, it generates a single, clear probability score for a recession occurring within a specific future timeframe.

Why It Matters

Recessions dramatically impact asset prices across all markets, from stocks to crypto. This pillar provides an early warning system, allowing predictors to position themselves ahead of major market downturns and price event contracts more accurately than the general public.

How It Works

First, the model collects daily data on key Treasury yield spreads, like the 10-year minus 2-year. Second, it incorporates the Sahm Rule indicator, which flags rapid increases in the unemployment rate. Finally, these inputs are fed into a probabilistic model that calculates the likelihood of a recession starting in the next 12 months, updated regularly to reflect new data.

Methodology

The core calculation is based on a probit model using the 3-month/10-year Treasury yield spread, a method similar to that used by the Federal Reserve. This is supplemented by the 2-year/10-year spread for confirmation and the Sahm Rule as a real-time trigger. The final probability is a weighted average of these signals, with a 12-month forward-looking window.

Edge & Advantage

It consolidates complex, often noisy economic signals into a single, actionable probability, removing the need for manual interpretation of multiple datasets.

Key Indicators

• 3m10y Yield Curve

  high

  The spread between 10-year and 3-month Treasury yields; historically the most reliable recession predictor.

• 2s10s Yield Curve

  high

  The spread between 10-year and 2-year Treasury yields; a widely watched indicator of economic sentiment.

• Sahm Rule Indicator

  medium

  Signals the start of a recession when the 3-month average unemployment rate rises by 0.50 percentage points.

Data Sources

• Federal Reserve Economic Data (FRED)

  Provides historical and current data for Treasury yields and unemployment statistics.

• U.S. Department of the Treasury

  Official source for daily Treasury yield curve rates.

Example Questions This Pillar Answers

• → Will the NBER declare a US recession by Q4 2025?
• → Will the 2s10s yield curve remain inverted for more than 3 consecutive months?
• → Will the Federal Reserve cut interest rates in the next 6 months?

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