Peter Smith
The U.S. economy just got some breathing room. New data from the Federal Reserve Bank of Cleveland shows recession odds have tumbled to 25.7% - a dramatic drop from the 60%+ levels we saw just months ago.
Why the Yield Curve Matters for Recession Calls
As ISABELNET pointed out, this shift is giving both markets and policymakers reason to feel cautiously optimistic about avoiding a major economic downturn.
The yield curve has an almost eerie track record when it comes to predicting recessions. Looking at the historical data, nearly every gray recession bar on the chart followed a curve inversion. During 2022 and most of 2023, we saw one of the deepest inversions in decades, which sent recession probabilities through the roof. Now that those odds are cooling off, it suggests the economy might be finding its footing again.
What's Behind the Improving Outlook
The drop in recession probability comes down to several key factors:
- American consumers keep spending despite higher interest rates
- Inflation has cooled off significantly, reducing pressure for more aggressive Fed action
- Corporate earnings have surprised to the upside across many sectors
- Markets are pricing in potential rate cuts for 2025, which should help support growth
The forecast model clearly shows this downward trend continuing, suggesting we might be past the worst of the recession fears.
Every major spike in recession probability since the 1960s has eventually led to an actual downturn, which makes this model particularly credible. But there have also been false alarms where recession fears faded without a crisis materializing. That's exactly what many are hoping for right now.
At 25.7%, recession odds are still elevated compared to normal times, but they're nowhere near the panic levels we saw earlier. The big question for investors has shifted from "when will the recession hit?" to "can the U.S. pull off a soft landing?" With the Fed carefully managing monetary policy and the economy showing resilience, there's growing optimism that America might thread the needle and avoid a sharp contraction altogether.
Peter Smith
