Over the summer, fears of a recession began to tick higher. It was never the Wall Street consensus (when is a recession call ever Wall St consensus?), but it certainly was a concern for many.
Recent data has taken the analyst community back towards a growth consensus and away from fears of a significant slowing. The perhaps premature conclusion is we have avoided a recession. These two recent Bloomberg articles are typical of the consensus:
Various data points we see get cited by the economic bulls: CapEx spending, Stock Market gains, Corporate Earnings, GDP, Retail spending. These data points are worth watching closely, as they do have the capability to help skirt a cyclical slow down.
However, they are being offset by employment weakness, falling wages, inventory builds, excess debt, slowing profit growth, de-leveraging, Consumer Confidence, housing overhang, to say nothing of European woes and budding issues in China.
What most people find especially surprising is my tendency to have a bullish exposure while increasingly raising expectations of a recession. There are a few reasons for this:
1. Frequently, markets and the economy go separate ways;
2. Most recessions have begun in a quarter with positive GDP.
3. S&P 500 companies are deriving profits globally, and recession may be local.
4. Different time periods: Market moves are short term (3-6 months), while economic shifts are intermediate (6-24 months).
Just as no stock market moves in a straight line, so too no economy expands or contracts in a simple linear fashion. We find ourselves in a phase where oscillations within the broader market cycles will increasingly cause people to feel comfort that we have avoided a recession.
From January to today, I have raised my estimates for a recession over the next 18 months from 15% to over 50%.
Based on the data I have reviewed, I see nothing that makes me firmly believe we will miss a recession. However, if we continue to see improvements, and especially if Employment gains traction, I will gladly lower that forecast to under 50%.
Regardless, my short term market expectations remain bullish, and I expect to see further gains before I reduce my equity exposure.
This post originally appeared at The Big Picture and is reproduced with permission.
One Response to “Is the U.S. Still on the Verge of Recession?”
The myriad of datapoints that get released each month, many times conflicting can confuse the devil out of anyone. That is why a purely quantitative approach to recession forecasting is required. Our model puts at 20% probability. I would load the graphic up but this comments section doesnt allow it.