Predicting U. S. recessions : the housing market and 2008 recession

Predicting U.S. recessions using the slope of the Treasury yield curve has been the focus of extensive research over the past two decades. This yield curve has consistently predicted economic downturns in the United States whenever the curve becomes flat or inverted and recent research has concluded that adding the federal funds rate produces a more accurate model. With the recent recession of 2008 and the housing market\u27s suspected role, I use new data and add a housing index variable to previous models in order to test the correlation and improve the predictive power of the overall model. I run multiple probit regressions to estimate probabilities of a recession within a number of future quarters. I find that models that include the housing index variable in addition to the yield curve and federal funds rate variables give a better in-sample fit and performance than models that do not use it. I discuss the implication of these results in light of the recent recession, and in terms of what this could imply for the future