December 2008 Report
December 20th, 2008
On this website we publish our recession probability estimates and forecasts for the US economy obtained using the methodology in Paap et al. (2009), as described below. The website is updated every month, shortly after the release of The Conference Board's Coincident Economic Index (CEI) and Leading Economic Index (LEI).
Figure 1. Recession Probabilities for the US Economy
Figure 1 shows recession probability estimates over the last ten years up to November 2008. These are based on the CEI and LEI vintages released on December 18th.
In November 2008, the LEI decreased 0.4 percent, and the CEI decreased 0.3 percent.
Our first estimates of the coincident and the leading recession probability for November 2008 equal 99 percent. On December 1st, the NBER announced that the business cycles dating commitee determined that the business cycle peak occurred in December 2007. Based on the current data vintage, we would conclude that the peak has occurred in November 2007, as the coincident recession probability increased from 39 percent in that month to 54 percent in December 2007. At the date of detection, which is May 2008, we estimated the peak to have occurred in January 2008.
The probabilities are obtained from a Markov-Switching model for monthly growth rates for the CEI and LEI. The model assumes that the two variables share the same cycle, where the LEI leads the CEI with lead times at peaks and troughs allowed to be different. The model therefore produces both a 'coincident' and a 'leading' recession probability.
Figure 2 shows coincident and leading recession probabilities since January 1959. The blue and green shaded areas indicate months that are part of periods during which this probability exceeds 0.5 for at least six consecutive months. This corresponds with the popular rule of thumb saying that the economy is in recession whenever economic growth is negative during two consecutive quarters. The recession periods as determined by the NBER are also shown for comparison.
Figure 2a. Recessions as determined by the NBER
Figure 2b. Recession Probabilities for the CEI
Figure 2c. Recession Probabilities for the LEI
Time series plots of the December 2008 vintages
Figure 3 displays the time series plots of the log levels and monthly growth rates of the LEI and CEI, together with the recession periods as determined by the NBER, indicated by the yellow shaded areas. The leading index has a similar cyclical pattern as the coincident index, but with turning points clearly occurring earlier, and recessions lasting considerably longer.
Figure 3a. Time Series Plots of the December 2008 Vintages: Levels
Source: The Conference Board
Figure 3b. Time Series Plots of the December 2008 Vintages: Monthly Growth Rates
Source: The Conference Board
