Recession Signals and Business Cycle Dynamics: Tying the Pieces Together

Michael Kiley

No 2023-008, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Examining a parsimonious, yet comprehensive, set of recession signals yields three lessons. First, signals from financial markets, leading indicators of activity, and gauges of the macroeconomic environment are each useful at different horizons, with leading indicators and financial signals informative at short horizons and the state of the business cycle at medium horizons. Second, approaches emphasizing the yield curve overstate the recession signal from the term spread if other factors are not considered; given correlations among indicators, these differences are often small, but were large in 2022. Finally, simulations of a reduced-form vector autoregression of unemployment and financial conditions, which captures the time-series properties of the series well, suggest the patterns are consistent with a typical hump-shape characterization of business cycle dynamics; this synthesis tightens the connections of the recession prediction literature with the business-cycle literature.

Keywords: Yield spread; Inflation; Unemployment; Recession forecast (search for similar items in EconPapers)
JEL-codes: E37 E47 G12 (search for similar items in EconPapers)
Pages: 40 p.
Date: 2023-01-20
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-08

DOI: 10.17016/FEDS.2023.008

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