Recession Probability
The model-implied or market-implied likelihood of a recession over a forward window — typically 12 months — derived from yield-curve, credit, and labor signals.
Definition
Recession probability models combine leading indicators (yield curve, credit spreads, ISM new orders, jobless claims) into a single time-varying probability. Different models weight signals differently; the NY Fed term-spread model is the most widely cited.
No single model is reliable in isolation, which is why institutional desks track several and weight them by current regime.
Why it matters
Recession probability drives the price of duration, the credit spread, and the equity risk premium. Mispricing it is the largest source of cross-asset miscalibration.
Worked example
The 2s10s inverted in July 2022; the NY Fed model peaked above 70% in 2023. The recession arrived later and shallower than expected — a cautionary tale about probability ≠ certainty.
Frequently asked
Which model is most reliable?⌄
Does an inverted yield curve guarantee recession?⌄
What invalidates a recession signal?⌄
How do markets price recession?⌄
Track it on Market Ontology
Related terms
Trade recession probability setups in real time
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