Are Recessions predictable?

                      Predicting Recessions

While recessions cannot be predicted exactly, there are some ways to calculate the probabilities at which they can occur at certain time. This article was originally posted on Quora website before the Corona-19 recession. 

Let's do some calculations.

Calculation 1

Time between recessions after World War 2 is (in months): 45,39,24,106,36,58,12,92,120,73, x. Here x is the time between June 2009 (end of the Great Recession) and next recession in months. What can we say about x? Using this calculator Standard Deviation Calculator we can calculate that the mean value of x is 60.5 months with sample standard deviation 36.1 months. This means that by July 2020 the probability for recession will climb up to 97% and 

by the end of 2020 the probability for recession is more than 98%. 

Calculation 2

This calculation is based on different approach to verify our conclusion from calculation 1. It is based on the inversion of the yield curve, the chart comes from JP Morgan Asset Management.

There is a significant lag between the first inversion date (March 22, 2019) and the onset of the recession. The average lag time is 14 months with standard deviation 4.7 months.

March 2019 + 14 months = May 2020 ( mean value)

December 2020 is 7 months or 1.5 standard deviations away from the mean value May 2020. Using this z-table we find that there is 93.3 % chance for financial recession by December 2020. This is fairly consistent with the result from calculation 1(though a little bit lower).

It should be noted however that 3 bear markets in the past were not accompanied by economic recessions. The average bear market lasted 1.3 years with an average cumulative loss 38%.