海角大神

Last week聽I reported on a relatively new recession probability聽indicator (鈥� the 鈥渕arkov switching鈥� series recently introduced to the Fed FRED/Blytic) that was giving a pretty clear, though preliminary, indication of probable recession.

Since then, there has been quite a bit of scuttlebutt around the econo-blogesphere (here聽and聽here) about this series and the validity of its present value.

While I agree that this series鈥� nearly 20% indication of recession is VERY preliminary (as I聽noted in my original post), I would like to respectfully take issue with the analysis offered by some of the 鈥渄ebunkers鈥� of this recession warning as well as add some further perspective on the series in general.

First, while Professors Chauvet and Piger suggested (in the聽original methodology paper) that a probability value at or above 80% for a period of three consecutive months was required for a positive indication of recession, I would like to point out that looking at the 鈥渕inimum鈥� and 鈥渕aximum鈥� extract of all reported values for this series indicates pretty clearly that the current 20% is not likely to be completely 鈥渞evised away鈥� as some would suggest.

Further, looking EXCLUSIVELY at the 鈥渕aximum鈥� reported values clearly shows that there is cause for concern in so much as NEVER has the 鈥渕aximum鈥� series indicated a value at or above 20% that a recession hasn鈥檛 followed within 6-8 months.

In order to determine the 鈥渕inimum鈥� and 鈥渕aximum鈥� series, I simply extracted the MIN and MAX values from every reported period (from Professor Piger鈥檚聽complete history of this series) for this series thus creating two additional series, one containing all the lowest reported values for each period and one containing all the highest reported values (you can聽download my spreadsheet here).