According to a new study by MIT and State Street, there is a 70% chance of recession in next six months.
The researchers created an index comprised of four factors and then used the Mahalanobis distance — a measure initially used to analyze human skulls — to determine how current market conditions compare to prior recessions.
Using this principle, the researchers analyzed four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve — on a monthly basis. They then measured how the current relationship between the four metrics compares to historical readings.
This recession measure is at odds with other recession probability forecasts which forecast a recession in the next twelve months at only 28% or less.
Recession is defined as two consecutive quarters of negative GDP growth. Well, it is possible that the coronavirus will damage China GDP and maybe US GDP, but the MIT/State Street study is based on Industrial Production, Non-farm payrolls, the stock market and the yield curve slope. Only the yield curve slope (orange line) and Industrial Production (yellow dashed line) are showing recession-like trends.
Unless of course, MIT/State Street are saying there is a stock market bubble that will burst.