The recessions forecasting in real time (case of the USA economy)

This article presents the principles and results of real time forecasting of recessions in the US economy using macroeconomic forecasting models, which has, as the model’s output, a single indicator of general economic activity that can be monitored monthly or at least quarterly: GDP-Based Recession Indicator Index; 2) Real-time Sahm Rule Recession Indicator; 3) Smoothed U.S. Recession Probabilities; 4) Composite Leading Indicator Index; and 5) Yield Curves Inversion Model. Usually, these models are used in practice by government regulators and business to make their decisions in real time, as they are simple to apply and are updated regularly. However, these models have no sufficient theoretical grounding, therefore it is difficult to define the best model to apply in practice, especially in the case of missed or false signals about impending recession or in the case of various forecasting results obtained from different models. Besides, this paper presents a US economy forecast made using the author’s CMI-model of macroeconomic dynamics, which has all advantages of the above mentioned models, but also has theoretical grounding for its single index of general economic activity that can be updated monthly. According to the CMI-model we may expect a new US recession (in accordance with official NBER methodology of a business cycle dating) at the end of second quarter of 2024. At the same period, we can expect a persistent growth in unemployment. As to the financial sector of US economy, its dynamics for the next few months will depend on Federal Reserve (Fed) policy. If Fed starts to decrease Federal Fund rate, one can expect new and significant absolute values (financial bubbles) for key financial indexes. If Fed is not able to reduce Federal Fund rate due to high inflation, financial indexes will possibly hold their high levels in average (or even increase as a result of expectations for the Federal Fund rate reduction or as a result of positive news from individual economic sectors or companies). The development of the financial bubble may continue until statistic data will be able to confirm the start of a new recession that would initiate a huge financial crisis. Obviously, the possible reduction of Federal Fund rate will increase the power of the expected financial crisis. In any case, such a financial crisis, initiated by a new recession, will probably occur in second half of 2024, since the statistics, which reflect the past state of the economy, will continue generating ambiguous signals as to the possibility of a new recession. And only closer to the end of 2024 unambiguous statistical data about the state of economy at the middle of the year will appear. However, the official dating of the recession in NBER terms will be probably done even later. In this case it will be the middle of 2025 or even later. Usually, the deeper the recession is, the easier and earlier it can be dated. To my mind, even if Fed reduces the Federal Fund rate, it may fail to help avoid new recession. Moreover, a significant level of inflation is unlikely to allow a relatively rapid reduction of the discount rate or any other aggressive boost for the economy.