The Recession Risk Score (0–100) aggregates seven macroeconomic signals. Each signal produces a sub-score (0–1) based on its current level and recent momentum, weighted by historical predictive power.
| Signal | Weight | What Triggers Risk |
|---|---|---|
| Yield Curve (10Y−2Y) | 40% | Sustained deviation from historical norm; inversion or rapid flattening |
| Credit Spread (Baa−10Y) | 20% | Significant widening signals corporate bond market stress |
| Sahm Rule | 15% | Real-time labor market deterioration toward recession threshold |
| LEI (BBK Leading Index) | 12% | Sustained deviation below long-term trend |
| Buffett Indicator | 5% | Market cap significantly above historical GDP ratio |
| Consumer Sentiment | 5% | Declining consumer confidence below historical norm |
| Shiller CAPE | 3% | Cyclically-adjusted P/E well above historical average |
Each signal’s sub-score uses a z-score (standard deviations above/below full historical mean), mapped to 0–1 where 2σ = full risk. Level contributes 70% and 6-month momentum 30%. A duration bonus adds up to 10 points when the yield curve has been inverted for 6–24 months. Score caps at 100.
The Yield Curve Spread measures the difference between 10-year and 2-year Treasury yields. A negative spread (inversion) has historically been one of the most reliable leading indicators of an impending recession.
The Sahm Rule signals the start of a recession when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months.
Often cited by Warren Buffett, this ratio compares total stock market valuation to GDP. An exceptionally high ratio suggests the market is overvalued and may be vulnerable to a downturn.
The Brave-Butters-Kelley Leading Index measures the leading component of the economic cycle using a dynamic factor model applied to ~500 monthly indicators. Values below zero signal below-trend economic activity.
The spread between Baa-rated corporate bonds and 10-year Treasuries reflects credit market stress. Widening spreads indicate investors are demanding higher premiums for corporate risk, a classic recession warning.
The official unemployment rate provides context for the Sahm Rule. The Sahm Rule triggers when the 3-month moving average rises 0.50pp above its 12-month low.
Developed by Nobel laureate Robert Shiller, the CAPE ratio divides the S&P 500 price by the 10-year moving average of inflation-adjusted earnings. A ratio above 30 signals elevated long-term valuations.
The University of Michigan Consumer Sentiment Index surveys households on their economic outlook. Sharp declines often precede recessions as consumers reduce spending and increase precautionary saving.