Still Wondering About Recession Risk

The debate about whether the U.S. economy is destined for a new recession remains unsettled, thanks to a mixed bag of numbers in the latest round of updates. The strongest case for thinking positively resides, ironically, in the labor market. Initial jobless claims, a key leading indicator, is moving in the right direction again, albeit from elevated levels. As I noted last week, the annual percentage decline in the raw data isn’t normally associated with broad economic contraction, and that’s a good thing. But confidence hangs on a thread these days and so tomorrow’s update will be closely watched. One bad number and the crowd may run for cover once more.

Yet the stronger pace of jobs creation in July implies that we’ll see better reports on jobless claims, but here too the confidence is thin. The labor market continues to grow, but sluggishly, inspiring analysts to hedge their forecasting bets.
Yesterday’s news on industrial production for July keeps hope alive. The surprisingly strong 0.9% rise last month translates into a 3.7% increase over the year-earlier period—comfortably above levels typically associated with the early stages of a fresh contraction.

The latest updates on retail sales and commercial and industrial loans reflect growth as well. But there’s plenty of darkness descending on the numbers elsewhere. The University of Michigan Consumer Sentiment Index’s decline this month to its lowest level since 1980 is distressing. Meanwhile, the housing market remains depressed, as yesterday’s news on housing starts reminds. Housing isn’t necessarily a drag on the broad economy any longer, but it’s also not a positive force yet either.
The stock market’s annual pace remains in positive territory. The S&P 500 is higher by roughly 6% vs. this time a year ago. That’s encouraging in the sense that new recessions are usually linked with year-over-year declines in the equity market. To the extent that Mr. Market can maintain an annual gain, the trend looks encouraging… up to a point. Indeed, there’s been a lot of chatter over the recent arrival of the so-called death cross. The S&P’s 50-day moving average has recently slumped under its 200-day average. Technical analysts label this is a bearish development of no small consequence. But history suggests that unless the 50-day average persists under its 200-day counterpart for some period of time, the signal may simply be short-term noise. It’s happened before. The question is whether it describes current conditions?
No wonder that economists are split about what it all means for estimating recession risk. You can certainly find analysts predicting the worst, but optimists (relatively speaking) aren’t unknown either. For example, Steve Leuthold of the Leuthold Group says there’s a one in three risk of a new recession, reports The Chicago Tribune. Goldman Sachs concurs, but adds that the distinction between growth and contraction may be so slight that there’s not much difference one way or the other.
The truth, of course, is that no one really knows if there’s another downturn coming. Based on the information we have at the moment, you can argue either side with some degree of persuasion. Uncertainty keeps us all guessing. Arguably some of the guesses are more informed than others, but figuring out which ones are which is no easier than predicting the economic trend.
“Slow growth doesn’t lock in a recession,” advises Dennis Lockhart, president of the Atlanta Fed. “In fact, some recent data we have on hand – retail sales and initial unemployment claims, for example – seem to contradict the direst predictions.”
But you can just as easily argue the opposite with the same reasoning: the arrival of slow growth doesn’t ensure that we’ll avoid a new recession.
So it goes when the macro trend enters a gray area. The only solution is waiting. We know the odds of recession are higher today vs. six months ago, but deciding if that constitutes a tipping point is a piece of information that can only be confirmed after the fact. Some simply refer to it as a familiar four-letter word: RISK.