Feb 5, 2020 - Economy

Skull analysis technique shows 70% chance of recession in 2020

Illustration of a padlock with a dollar sign.

Illustration: Eniola Odetunde/Axios

There is a 70% chance of recession within the next six months, according to a new recession indicator that examines the economy using a method previously used to analyze the resemblance of human skulls.

What it means: The new indicator comes from researchers at State Street Associates and MIT's Sloan School of Management who applied the principle of Mahalanobis distance to create a predictor of economic booms and recessions they call the KKT Index of the Business Cycle.

  • "This index offers a precise probability of recession or robust growth ... by comparing key variables to the patterns that prevailed during historical episodes," the study's co-author William Kinlaw, senior managing director at State Street Associates, tells Axios.
  • It creates the new business cycle metric by incorporating U.S. data including industrial production, nonfarm payrolls, stock market return and the slope of the Treasury yield curve (10-year rate minus the federal funds rate).

What's happening: The latest reading shows that recession is more than twice as likely as high growth in the next six months. When the probability of recession last reached these levels, a recession occurred 70% of the time.

  • "This level is driven primarily by two factors: weakening industrial production and the slope of the yield curve," Kinlaw says.
  • "By comparison, the unconditional likelihood of a recession occurring in any six-month period is only 17%."

Why it matters: Going back to 1916, the KKT Index has risen "leading up to every recession so that the combination of its trajectory and level provides a reliable indicator of the likelihood of recession," the study finds.

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