The recession diffusion index
Methodology
The recession overlay is a diffusion index: eleven monthly US series, each reduced to a yes or no against a fixed threshold, then counted.
| Indicator | FRED series | Transform | Flashes when |
|---|---|---|---|
| Nonfarm payrolls | PAYEMS | Six-month change | below 0 |
| Real income less transfers | W875RX1 | Six-month change | below 0 |
| Industrial production | INDPRO | Year on year | below 0 |
| Real manufacturing and trade sales | CMRMTSPL | Six-month change | below 0 |
| Sahm rule | SAHMREALTIME | Level | 0.50 or above |
| Chicago Fed activity index, 3-month average | CFNAIMA3 | Level | below -0.70 |
| Yield curve | GS10 minus TB3MS | Level | below 0 |
| Building permits | PERMIT | Year on year | below 0 |
| Credit spread | BAA minus GS10 | Level | above the 80th percentile of the training period |
| Financial conditions | NFCI | Level | above 0 |
| Initial claims | ICSA, 4-week average | Year on year | above 10% |
States
Five or more flashing reads Recession, three or four Warning, otherwise Expansion.
Live rule and history
Since 26 August 2026 each indicator trips on its own latest monthly print, and the page shows the month beside each. The historical series, used for the chart, applies the older rule of the last month in which all eleven had printed. So a live reading can differ from what the history later records for the same month; the live reading is the more current, the history the more complete.
Validation
Backtest against NBER recession dates from 1971, with everything from 2000 onward held out. The coincident model reached an out-of-sample AUC of 0.976. At the five-indicator cut it recalled 93% of recession months with one false alarm since 2000. Per indicator, out of sample since 2000:
| Indicator | AUC |
|---|---|
| Initial claims | 0.919 |
| Nonfarm payrolls | 0.863 |
| Real manufacturing and trade sales | 0.859 |
| Financial conditions (NFCI) | 0.842 |
| Chicago Fed activity index, 3-month average | 0.836 |
| Sahm rule | 0.831 |
| Industrial production | 0.804 |
| Real income less transfers | 0.786 |
| Credit spread, Baa minus 10-year | 0.715 |
| Building permits | 0.698 |
| Yield curve, 10-year minus 3-month | 0.424 |
AUC is the chance the indicator ranks a random recession month above a random healthy one; 0.5 is a coin toss. The yield curve's low score on a month-by-month test is consistent with an indicator that leads by a year or more, which is why it sits among the leading five rather than the coincident six. Past backtest results do not guarantee future results.
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