Recession & Regime Probability Model

Overview

This model analyzes key economic and financial stress signals to calculate the real-time probability of a recession. It provides a crucial early warning system for major shifts in the economic landscape.

What It Does

The pillar combines a proven, rule-based unemployment indicator (the Sahm Rule) with a broad measure of financial market stress (Financial Conditions Index). It then layers in real-economy data like bankruptcy filing trends. This multi-faceted approach creates a robust probability score for an impending economic contraction.

Why It Matters

Accurately timing the start of a recession provides a massive edge in markets related to interest rates, stock indices, and elections. This model moves beyond sentiment and single-indicator analysis to offer a data-driven probability of a major economic regime change.

How It Works

First, the model continuously calculates the Sahm Rule trigger using the latest unemployment data. Concurrently, it tracks a weighted Financial Conditions Index composed of credit spreads, volatility, and other market metrics. Finally, it combines these signals with the momentum in bankruptcy filings using a logistic regression model to produce a final recession probability.

Methodology

The core calculation is a logistic regression model. Key inputs include: 1. Sahm Rule Trigger (Binary): (3-month avg unemployment rate - 12-month low unemployment rate) >= 0.50. 2. Financial Conditions Index (Continuous): A Z-score composite of credit spreads (e.g., BAA-AAA), equity volatility (VIX), and other financial variables. 3. Bankruptcy Momentum (Continuous): A year-over-year percentage change in total business bankruptcy filings.

Edge & Advantage

It blends a lagging but highly reliable real-economy indicator (unemployment) with forward-looking financial market data, reducing the false positives common in other models.

Key Indicators

• Sahm Rule Trigger

  high

  A historically reliable indicator that signals the start of a recession when the 3-month average unemployment rate rises 0.50 percentage points above its 12-month low.

• Financial Conditions Index (FCI)

  high

  A composite index measuring the level of stress across financial markets, including credit, equity, and funding markets.

• Bankruptcy Filing Momentum

  medium

  The year-over-year change in business bankruptcy filings, serving as a direct signal of corporate distress in the real economy.

Data Sources

• FRED (Federal Reserve Economic Data)

  Provides official U.S. unemployment data required for the Sahm Rule.

• Chicago Fed / Goldman Sachs

  Publish widely-used Financial Conditions Indices that serve as inputs for the model.

• U.S. Courts (Pacer Service Center)

  Source for official bankruptcy filing statistics.

Example Questions This Pillar Answers

• → Will the NBER declare a U.S. recession has started by Q4 2024?
• → Will the Federal Reserve cut its target interest rate in the next 6 months?
• → Will the Sahm Rule be triggered in the current calendar year?

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