MIT Study: There Is A 70% Chance Of A Recession In The Next 6-Months

Darren.Woon

Researchers created a recession indicator and announced that there's a 70% chance for recession in the coming months.

New research from the MIT Sloan School of Management and State Street Associates announced that there’s a 70 percent chance that a recession will hit in the next six months, according to CNBC.

The researchers created an index consisting of four factors and then used the Mahalanobis distance -- a measure initially used to examine human skulls -- to determine how current market conditions compare to past recessions. 

“The Mahalanobis distance was originally conceived to measure the statistical similarity of the values of a set of dimensions for a given skull to the average values of those dimensions for a chosen group of skulls,” the researchers explained. 

It measures the distance between a point and a certain distribution.

The researchers analyzed four market factors -- industrial production, nonfarm payrolls, stock market return, and the slope of the yield curve -- each month and measured how the current relationship between the four components compared to historical readings. 

According to the researchers, the index was a reliable recession indicator since it increased leading up to every past recession. Looking at data back to 1916, they found that when the index hit 70 percent, the likelihood of a recession in the next six months rose to 70 percent. 

As of November 2019, the index sat at 76 percent. 

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Comments (1)
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Roy Haines
Roy Haines

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