A Recession Or A Rough Patch?

Chatter about a new recession ticked up yesterday after the Greek debt crisis took another turn for the worse. Yale economist Robert Shiller, author of Irrational Exuberance, says there’s a “substantial” risk that the U.S. faces another downturn. There’s certainly plenty of support from the man on the street. Close to half of Americans think the U.S. is headed for a new recession, according to a freshly minted NBC News/Wall Street Journal poll. Perhaps, but the numbers suggest that this future isn’t fate at this point. If we’re looking at the economic and financial numbers, there’s still plenty of room for debate on the next phase for the business cycle.

There are dozens of reports to consider, of course, but one that’s been timely in dropping clues about new trouble in the pace of economic growth is sending mixed messages at the moment. Indeed, nearly a month ago the yield spread between nominal and inflation-indexed Treasuries was flashing a warning, as we noted. A similar round of caution was dispensed by this metric a year ago, ahead of the summer slowdown in 2010. And in anticipation of the subsequent revival in the economy in recent months, this yield spread was ahead of the curve once again, as suggested by the rising trend from late-August onward. What’s this indicator telling us now? It seems to be in a holding pattern after it’s recent drop.
As the chart below shows, the yield spread in Treasuries remains in the 2.25% range. Although it was falling consistently in the recent weeks, the decline appears to have taken a breather. The descent may resume, of course, which would be a discouraging sign of the market’s expectations on inflation, and by extension the outlook for economic growth. But for now, at least, the crowd seems to be waiting for more data.

There are other market metrics that suggest the jury’s still out on the odds for a new recession. The 12-month percentage change in the S&P 500, for instance, which tends to go negative concurrently if not in advance of a new recession, is still comfortably positive. Credit spreads also remain relatively low. And U.S. industrial production’s 12-month change is still comfortably in the black as well. Several other economic and financial indicators remain positive too.
The problem is that there’s deterioration in the general trend. Deciding when the deterioration becomes a bonafide sign that a recession is upon us is tricky. No one really knows for sure when economic growth turns into contraction. But history suggests we’ll have a number of indicators telling us that the danger levels are in the red zone. We’re not there yet, although it’s certainly conceivable at this point that we’re on our way.
Meantime, we’ll be watching each new data point carefully. Next up: Today’s update on weekly jobless claims, scheduled for release this morning at 8:30 eastern.