Will the economy go into recession over the next six months?
|Incoming economic data shows deceleration but the overall picture is still historically inconsistent with imminent recession. The 10yr-3m yield curve hasn’t yet inverted. And the 10yr-2yr has recently been steepening with rising interest rates rather than steepening with falling interest rates (which is typically the recession warning sign). The 10yr-2yr is probably still in an overall flattening trend and seems likely to invert again before the next recession.
In terms of magnitude, the recent oil price spike is not quite consistent with past instances that catalyzed recessions. Weakened demand from China is perhaps countering some of the negative supply shock. Nevertheless, the China slowdown is still a headwind for the global economic outlook on net.
The Conference Board’s LEI index continues to make new all-time highs with broadly positive readings among the subcomponents. Consumer confidence remains the weakest link. Confidence is low mostly due to inflation–the national average gas price just made new all-time highs again.
Leading indicators for the labor market, looking at the San Francisco Fed model, continue to be strong. Overall, the data suggests modest but continued economic growth in the near-term.
Last week’s jobs report was mixed. Headline job gains were good (+428k), but the labor force participation rate fell and there was a discrepancy between the establishment and household surveys (establishment= +428k, household= -353k).
Rising mortgage rates are likely to diminish housing demand somewhat but the picture of overall housing activity–as seen in building permits and housing starts–is still inconsistent with going into a recession.
In general, the data suggests we remain in an ongoing, albeit mild, expansion. Expansion is the natural state of the economy, so the burden of proof is always on the pessimists. While recession risk is definitely elevated, the evidence is not beyond a reasonable doubt that the economy will go into recession over the next six months. More medium-term (i.e., 6-24 months), I think a soft-landing or mild recession remain more likely than a major recession.
Nevertheless, there is a great deal of global uncertainty–with exogenous shocks from the Russian invasion of Ukraine and China lockdowns.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.