Forecasting US Recessions: The Role of Economic Uncertainty

Abstract

This paper highlights the role of macroeconomic and financial uncertainty in predicting US recessions. In-sample forecasts using probit models indicate that these two variables are the best predictors of recessions at short horizons. Macroeconomic uncertainty has the highest predictive power up to 7 months ahead and becomes the second best predictor --- after the yield curve slope --- at longer horizons. Using data up to end-2018, out-of-sample forecasts show that uncertainty contributed significantly to lowering the probability of a recession in 2019, which indeed did not occur.

Keywords: macroeconomic and financial uncertainty, yield curve slope, recession, probit forecasting model

JEL Classification: D81, E32, E37, E44