Treasure Recession Probability Index

Data model indicating recession periods in the past 30 years
Economy
Luca Rassenti & Ben Verschuere
|
May 5, 2022

Part of the job of finance leaders and executives is to focus on the futures of their companies, and this future can sometimes be impacted by large macro events; the biggest of them being a recession. Because recessions tend to be dramatic events in the business cycle, given the rapid change and disruption they can create, it is natural for business leaders to seek insights into the likelihood of recessions in order to inform their decisions ahead of time.

Unfortunately, access to solid recession forecasts is hard to come by. This is compounded by the current environment of information overflow which makes it difficult to extract the signal from the noise and more importantly doing so consistently. It is in this vein that we have built our recession model and are sharing it to help businesses further strengthen their future.

Following Treasure’s data driven ethos, our recession model helps systematically track, in real time, the odds of a recession. The model is based mostly on macroeconomic data which can be viewed as leading indicators for the general economic condition. Combining these leading indicators together and using some functional transformation, we can generate a recession probability estimate which isn’t derived from thin air but backed by hard data. 

As the chart below shows, our model provides estimations of recession probability over three different time horizons in order to fully capture the likelihood of recession over the short and medium term. Our model’s predictive performance during previous recessionary environments gives us a certain amount of confidence in its ability to forecast such occurrences in the future (while every recession is different they tend to rhyme).

Data: Bloomberg

Treasure’s recession model achieves two key objectives: Consistency by removing any subjective bias (which tends to be prevalent in financial media) and insightful real-time information. Typically recession assessment relies on GDP data which is released with a lag, and it can take up to 8 months for recessions to be detected ex-post. Our model, on the other hand, is able to preemptively assess the odds of recessions ahead of time and in real-time, enabling us to detect them before they start occurring (the model also gives information about when a recession stops, which is helpful to detect the upswing in the business cycle). 

As the chart below shows, having a good handle on recession probability is not only useful for business leaders but also indicative of financial markets, as typically recessions tend to create sharp drops in stock prices.

Data: Bloomberg

As we have shown, the Treasure recession model has done a pretty good job at identifying previous recessions ahead of time. Internally, this model helps Treasure optimize our clients’ cash management allocations and thereby enhances the returns we are able to deliver on their idle cash. We also hope this model provides business executives and finance leaders a reliable indicator they can track over time with our economic insights.

Luca Rassenti (Director of Quantitative Investment) & Ben Verschuere (Chief Investment Officer)

Treasure Investment Management, LLC

Disclaimer: The views and opinions in this piece are just the author's own, offered to the public at large and not to any one particular investor.

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