How Is a Recession Score Model Calculated?

A recession score model calculates recession probability by analyzing multiple economic indicators simultaneously and comparing current conditions to historical recession patterns. Most models produce a 0-100 scale where scores above 70 indicate elevated recession risk within the next 12-18 months, while scores below 30 suggest economic stability.

The methodology combines leading indicators (like yield curve inversions and unemployment claims) with coincident indicators (employment data, industrial production) to create a weighted composite score. Each indicator receives a specific weight based on its historical accuracy in predicting recessions, with the most reliable signals carrying 15-25% of the total score.

Recessionist Pro tracks these indicators (and 14 more) daily. See the live dashboard.

Core Components of Recession Score Calculation

Effective recession scoring models typically incorporate 10-20 economic indicators across four categories, each contributing different weights to the final calculation:

Labor Market Indicators (25-30% weight)

• Unemployment rate changes: A 0.5 percentage point increase over 3 months signals potential recession
• Initial jobless claims: Four-week moving average above 400,000 adds significant weight
• Job openings ratio: JOLTS data showing declining job availability
• Sahm Rule trigger: When activated, this alone can push scores above 80

Financial Market Signals (20-25% weight)

• Yield curve inversion: 10-year minus 2-year Treasury spread below -0.25% for 3+ months
• Credit spreads: Investment-grade spreads widening beyond 150 basis points
• Stock market volatility: VIX sustained above 25 for extended periods
• Leading Economic Index: Three consecutive monthly declines

Economic Output Measures (20-25% weight)

• Industrial production: Year-over-year decline exceeding 2%
• Real personal income: Adjusted for inflation, showing negative growth
• Manufacturing PMI: Below 50 for three consecutive months
• Consumer spending trends: Real retail sales declining month-over-month

Monetary and Credit Conditions (15-20% weight)

• Federal funds rate positioning: Restrictive policy relative to neutral rate
• Money supply growth: M2 growth rates below historical averages
• Bank lending standards: Senior loan officer surveys showing tightening
• Consumer credit growth: Slowing credit card and auto loan originations

Mathematical Framework Behind Recession Score Models

The calculation process involves several mathematical steps that transform raw economic data into a standardized risk score:

Step 1: Data Normalization

Each indicator gets standardized using z-scores to account for different measurement units. For example, unemployment rate changes and yield curve spreads both contribute meaningfully despite using different scales. The formula applies:

Z-score = (Current Value - Historical Mean) / Standard Deviation

Step 2: Historical Recession Correlation

Models analyze each indicator's performance during the 12 official U.S. recessions since 1945. Indicators receive higher weights based on their success rate in signaling recessions 6-18 months in advance. The most reliable indicators typically show:

• True positive rate: 85%+ accuracy in predicting actual recessions
• False positive rate: Less than 20% incorrect recession signals
• Lead time consistency: Signals appear 12-18 months before NBER recession dates

Step 3: Weight Assignment and Aggregation

The model assigns weights through logistic regression analysis, optimizing for maximum predictive accuracy. A typical weighting might look like:

Indicator Category	Weight Range	Key Threshold
Yield Curve Inversion	15-20%	-25 basis points
Unemployment Change	12-18%	+0.5 percentage points
Leading Economic Index	10-15%	3 consecutive declines
Credit Spreads	8-12%	150+ basis points

How RecessionistPro's 15-Indicator Model Works

Our recession score calculation tracks 15 specific indicators daily, updating the composite score based on real-time data feeds from federal sources. The model uses a proprietary weighting system developed through backtesting against recession periods from 1970-2023.

The system processes new data each morning, recalculating indicator z-scores and applying the weighted formula. When multiple indicators simultaneously signal distress, the score can jump significantly within days rather than weeks.

Daily Score Updates

The model incorporates new data as it becomes available:

1. Market data: Updated every trading day (yield curves, credit spreads, volatility)
2. Economic releases: Integrated on publication dates (employment, manufacturing, consumer data)
3. Federal Reserve data: Money supply, lending standards updated weekly or monthly
4. Composite calculation: Final score recalculated each morning at 6 AM EST

Interpreting Recession Score Ranges

Understanding what different score ranges mean helps you make informed investment and financial planning decisions:

Low Risk: 0-30

Scores in this range indicate stable economic conditions with minimal recession probability over the next 18 months. Historical analysis shows less than 5% chance of recession when scores remain below 30 for extended periods. This environment typically supports:

• Growth stock investments and sector rotation strategies
• Moderate leverage in real estate or business expansion
• Standard emergency fund levels (3-6 months expenses)

Moderate Risk: 31-60

This range suggests some economic stress but not imminent recession risk. About 15-25% of periods in this range lead to recession within 18 months. Investors should consider:

• Reducing portfolio beta and increasing defensive positions
• Building larger cash reserves (6-9 months expenses)
• Avoiding major financial commitments or job changes

High Risk: 61-80

Elevated scores indicate significant recession probability (40-60% chance within 18 months). Multiple indicators show stress, requiring defensive positioning:

• Shift toward defensive sectors (utilities, consumer staples, healthcare)
• Increase bond allocation, particularly Treasury securities
• Extend emergency funds to 9-12 months of expenses
• Delay major purchases or discretionary spending

Critical Risk: 81-100

Scores above 80 historically precede recession 70-85% of the time. This signals immediate preparation for economic downturn:

• Maximum defensive positioning with significant cash reserves
• Focus on recession-resistant investments and dividend aristocrats
• Secure employment situation and avoid career risks
• Consider completing your recession preparation checklist

Model Limitations and Accuracy Considerations

Even sophisticated recession score models face inherent limitations that users must understand:

False Signals and Market Noise

Historical backtesting shows recession models generate false positives roughly 20-30% of the time. The 1998 and 2011-2012 periods saw elevated recession scores without subsequent recessions, often due to external shocks (Asian financial crisis, European debt crisis) that didn't translate to U.S. recession.

Timing Uncertainty

While models excel at identifying recession risk, timing remains imprecise. Scores can remain elevated for 6-24 months before recession begins, creating challenges for tactical investment decisions. The yield curve, for example, inverted in early 2006 but recession didn't begin until December 2007.

Structural Economic Changes

Economic relationships evolve over time, potentially reducing model effectiveness. The service economy's growth, Federal Reserve policy changes, and global financial integration may alter how traditional indicators perform. Models require periodic recalibration using recent data.

Using Recession Scores for Investment Strategy

Recession scores work best as one input in a comprehensive investment framework rather than a standalone timing tool:

Portfolio Allocation Guidelines

Adjust asset allocation based on score ranges while maintaining long-term perspective:

• Score 0-30: Standard risk allocation (60-80% stocks, 20-40% bonds)
• Score 31-60: Moderate defensive shift (50-70% stocks, 30-50% bonds/cash)
• Score 61-80: Defensive positioning (30-50% stocks, 50-70% bonds/cash)
• Score 81-100: Maximum defense (20-40% stocks, 60-80% bonds/cash)

Sector Rotation Strategy

Higher recession scores favor defensive sectors with consistent earnings and dividends. Historical analysis shows utilities, consumer staples, and healthcare outperform during high-score periods by 200-400 basis points annually.

Technology and discretionary sectors face the greatest risk during elevated score periods, often declining 15-25% more than defensive sectors during actual recessions.

Combining Multiple Economic Data Sources

Effective recession analysis requires integrating score models with additional data sources for comprehensive economic assessment:

Professional investors often combine recession scores with Federal Reserve economic databases and economic calendar applications to track real-time developments that might affect model calculations.

Understanding how Federal Reserve policy influences recession cycles provides crucial context for interpreting score changes, especially during periods of monetary policy transitions.

Recession score models provide valuable economic insight but cannot predict exact timing or guarantee accuracy. Use scores as one component of comprehensive financial planning alongside professional advice appropriate for your individual circumstances.