We updated our existing toolkit to predict recessions. We present a set of Probit models that generate probabilities of a recession over the next year. Two major changes were introduced. The first change presents new methods based on the CPI to better capture today's inflation risk. The second change expands the framework's forecast horizon from 6 months ahead to 12 months ahead.
The new regressions with the CPI also signal recession. Each model with the CPI as a predictor variable showed the probability of recession surpassing 50% in Q1-2022. Furthermore, the average probability of the framework's eight regressions also crossed 50% in Q2-2022.
Given the historical accuracy of this Probit approach, a recession in the next year is more likely than not, in our view.
We do not think the U.S. economy is in a recession at present. Our forecast calls for a recession starting in Q1-2023 with three consecutive quarters of negative real GDP growth and output growth turning positive in Q4-2023.
We have been forecasting that the U.S. economy would slip into recession in 2023, and our latest projection calls for the recession to start in Q1-2023. The Probit framework set forth in this report supports that call.
- Wells Fargo
Comments