Jim Hamilton writes:
Econbrowser: Recession probability index rises to 26.2%: The new GDP numbers also allow us to update our recession probability index. This is a simple pattern-recognition algorithm that looks at whether the recent behavior of GDP looks more like what typically happens in an expansion or a recession. It is not a forecast of what may come next, but rather an assessment of where the economy has been. To do this with sufficient reliability to describe the state of the economy for 2007:Q2, we will want to wait another quarter for the data to be revised and the further very useful signal about 2007:Q2 that will come from the advance 2007:Q3 estimate when it is released in October. With the just-released 2007:Q2 data, we are in a position to make the call for 2007:Q1. The growth rate for that quarter is now reported to have been 0.6%, and it followed a string of weak growth rates in 2006. As a result, the value of the recession probability index for 2006:Q1 turns out to be 26.2%, its highest value since 2001:Q4.
The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date. Shaded regions represent dates of NBER recessions, which were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.
Note that this inference does make use of the strong 2007:Q2 advance estimates--had 2007:Q2 growth been weaker, the inference for 2007:Q1 would have been even more pessimistic. All of which is a reminder that the latest GDP numbers do not prove that we're out of the woods yet...
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