Is US Recession Risk Rising? Warning Signs Are Starting To Emerge
The discussions around a potential recession in the US are gaining momentum. As we navigate through uncertain economic territories, the blend of optimism and caution paints a complex picture for the upcoming business cycle. While some indicators signal sustained expansion, others point towards a slowdown that could spell trouble as we move towards the latter half of the year and into early 2025.
Despite the mixed signals, recent trends observed in multi-factor indexes, such as those featured in the weekly updates of The US Business Cycle Risk Report, indicate a notable shift. The Economic Trend Index (ETI) and the Economic Momentum Index (EMI) have shown signs of weakening after a period exceeding a year of recovery post-downturn. Although these benchmarks remain above the crucial levels that traditionally signify recessionary conditions—based on the latest data through May—it’s becoming increasingly apparent that they have reached their peak. Projections suggest a continued decline, nearing these critical thresholds as early as July. This trend underscores the possibility of recessionary conditions emerging around August, though such a forecast remains speculative at this stage.
Another methodology, the Composite Recession Probability Index (CRPI), provides a slightly more optimistic outlook, illuminating the inherent uncertainty in economic forecasting. The CRPI, which amalgamates several business cycle indexes, including the ETI and EMI, alongside metrics from other sources, registers a mere 5% probability of a recession as per the latest updates. This figure represents a low risk of an imminent downturn according to the standards defined by the National Bureau of Economic Research (NBER). However, a concerning aspect is the index’s recent uptick, which, if it continues, especially in conjunction with the weakening found in the ETI and EMI, could indicate troublesome times ahead for the second half of 2024.
The debate among economists regarding the possibility of circumventing a recession remains lively. There’s a consensus that proactive measures, particularly in the domain of interest rate adjustments, could significantly mitigate the impending risk. However, time is of the essence. Claudia Sahm of New Century Advisors encapsulates this sentiment by expressing concerns over the Federal Reserve’s current stance. She articulates a base case against a recession but doesn’t shy away from acknowledging the looming threat. “It’s a real risk, and I do not understand why the Fed is pushing that risk. I’m not sure what they’re waiting for. The worst possible outcome at this point is for the Fed to cause an unnecessary recession,” Sahm remarks.
As we continue to wade through the evolving economic landscape, the juxtaposition of growth and downturn indicators serves as a reminder of the intricacies involved in predicting the US business cycle’s trajectory. While some signs of worry start to emerge, the future, laden with variables and unforeseen events, remains unwritten, urging both policymakers and market participants to navigate with caution and preparedness.
