Yahoo Finance: "A popular recession indicator is flashing red — Here are three reasons why it's wrong"

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Yahoo Finance: "A popular recession indicator is flashing red — Here are three reasons why it's wrong"

Excerpt from Yahoo Finance quoting DataTrek’s Nick Colas:

…. “The New York Federal Reserve’s closely watched model for June is pricing in a 32.9% chance of a recession within the next 12 months. That’s up from 28% in May.

Add to this a falling 10-year Treasury yield, calls for a Federal Reserve rate cut just months after December’s rate increase, and overall worry about the old age of this economic cycle, and the recession picture starts to become clearer.

But the Fed’s indicator may be wrong for three reasons, as highlighted by market strategist Nick Colas, co-founder of DataTrek Research.

Oil prices

First, the model ignores surging oil prices. The last three times where the NY Fed recession model breached 30% (in June 1990, July 2001, and August 2007), oil prices doubled.

“The U.S. has not seen a recession since 1970 without oil prices doubling,” Colas wrote in a note to clients. “A doubling of oil prices in the current environment of high U.S. production seems a remote possibility and at least puts a large asterisk next to the current 33% chance of a recession in 12 months”….

Read the full article here on Yahoo Finance!