US Economy Scenario Probability Model

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Weekly Dashboard: 04 Nov 2025. 

I may hate Trump but as regards the US economy, I have to go by the data. And currently the US economy still doesn't look like its going to implode- despite the national debt of US$38 trillion, impact of tariffs on consumers and businesses, de-dollarization moves by China, and BRICS, and signs of weakness in the labor market. Add to that, the Fed's coming intrerest rate reductions and money printing, and one does wonder at the resilience of the US economy. Perhaps all those TACO (Trump Always Chickens out) on China helped saved the day. Anyways, take a closer look at each of the set of 8 economic indicators. Private credit risk still looks manageable going by the BAA Corporate Bonds Credit Spread despite the bankruptcy of auto loans and parts companies Tricolor and First Brands and the dangerously weak balance sheet of the small regional banks. But while the AI bubble continues to grow, the party in Wall Street goes on and make the rich feel giddy with their rising asset prices-while the poor also feel giddy but through lack of food as 42 million don't get their Food Stamps until the government shutdown ends. But doesn't mean the situation will not do a dramatic U-turn. So the weekly update will be useful.

Current Scenario Probabilities (as of November 30, 2025):

·        Soft Landing: 62.5%

·        Inflation First: 18.8%

·        Recession First: 18.8%

·        Stagflation: 0.0%

 Modal Scenario: Soft Landing remains dominant, supported by moderating inflation (2.5% core CPI), positive yield curve (0.51pp), and stable unemployment (4.3%). Credit conditions remain benign with spreads at 1.69pp.

Model Methodology

This model uses 7 streamlined economic indicators to calculate probabilities for four macro scenarios:

Input Variables

·        Core CPI (YoY): Inflation level - currently 2.5%

·        2s10s Yield Spread: Recession signal - currently +0.51pp (positive)

·        10Y TIPS Real Yield: Policy stance - currently 1.81%

·        5y5y Inflation Expectation: Forward inflation - currently 2.21%

·        Unemployment Rate: Labor market - currently 4.3%

·        Initial Jobless Claims: Leading labor indicator - currently 218K

·        BAA-10Y Credit Spread: Financial stress - currently 1.69pp

Scoring System

Each scenario receives 0-10 points based on indicator thresholds:

·        Soft Landing: Low inflation (2-3%), positive curve, stable employment, anchored expectations

·        Inflation First: High inflation (>3%), rising expectations, tight labor market

·        Recession First: Falling inflation, flat/inverted curve, rising unemployment

·        Stagflation: High inflation (>3.5%) + high unemployment (>4.5%) simultaneously

 Probabilities are calculated by normalizing scenario scores to sum to 100%.

 


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