Methods for Estimating Recession Probabilities from Economic Data

Summary

The document asks how published estimates of recession probability over coming quarters were calculated, referring to estimates reported in a 2016 article for the United States and euro area. The accepted response says there are several possible approaches and points to research on yield curves as leading indicators, business-cycle dynamics with factor structures and regime switching, and smoothed recession probabilities.

This is a pointer to relevant academic and practitioner literature, not a derivation of the cited figures. It does not identify which method Goldman Sachs used for those estimates, describe the data or model specification, or assess forecast performance. The cited research topics suggest that recession probabilities can be estimated through indicator-based or regime-switching frameworks, but the document itself offers no implementation details or comparative evidence.

Key ideas

• The question concerns the calculation of recession probabilities over future quarters.
• The response names yield curves as one potential leading indicator.
• Factor structures and regime-switching models are cited as approaches to business-cycle dynamics.
• Smoothed recession probability estimates are another referenced line of work.
• The document does not identify the method behind the particular published estimates.

Tags

# How were the probabilities of recession over the next four quarters calculated in this table?


# How were the probabilities of recession over the next four quarters calculated in this table?












http://www.bloomberg.com/news/articles/2016-02-08/goldman-sachs-says-defy-mr-market-as-recession-risk-still-low

> The probability of a slump in the U.S. is just 18 percent and 23 percent over the two timeframes respectively, while the euro-area threat is greater at 24 percent and 38 percent, according to Goldman Sachs.

Article was published on 8Feb2016.

## Answer by Helin (score 1, accepted)

https://quant.stackexchange.com/a/23171

There are quite a few ways to compute this. Refer to The Yield Curve as a Leading Indicator, An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching, and Smoothed U.S. Recession Probabilities. These are used in academic and by practitioners alike.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.