Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model is based on a 1998 paper "An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, 1998, 39, 969-996.
http://faculty.ucr.edu/~chauvet/ier.pdf
Recessions are usually determined retrospectively. In other words, it is only after a period of economic decline that it can be determined that a recession has occurred. The National Bureau of Economic Research (NBER) is the organization that officially declares when a recession has begun and ended in the United States. Indicators like the Smoothed U.S. Recession Probability could give a headstart in the speculation that a recession has already started while not officially declared.
For example, the Great Recession of 2007-2009 was officially declared by the National Bureau of Economic Research (NBER) to have begun in December 2007. It was not until over a year later, in December 2008, that the NBER officially announced that the U.S. was in a recession. Meanwhile, the smoothed recession probability shot upwards in early 2008 already. Video by Benjamin Cowen.
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