Late last year, and into early 2023, the crowd was all in on the inevitability of a US recession starting in the near future. A Bloomberg headline captured the zeitgeist as the new year dawned: “The Most-Anticipated Downturn Ever.” But as September draws to a close, the current business-cycle nowcast continues to indicate low risk as the economy chugs along.
To be fair, there’s always another recession on the horizon. The uncertainty is always a matter of two items: timing and depth. The good news is that a number of analytical techniques have reduced some of the mystery on the former in terms of nowcasting and forecasting for the very near future. On that front, there’s still a solid case for estimating a low level of recession risk. There are new clouds on the horizon beyond a month or so, but it’s premature to say with confidence whether that’s noise or signal.
Let’s start with the current scenario. First up: it’s looking increasingly likely that the upcoming third-quarter GDP report for the US will post a moderate gain if not accelerate relative to Q2’s 2.1% increase. As noted last week, recent nowcasts from a range of sources reflect a median nowcast of 3%-plus growth for Q3 GDP.
Economic activity in August slowed, according to the hard-data profile via the Chicago Fed’s National Activity Index. But the expansion, although easing to a modest below-trend pace last month, is still nowhere near recession conditions, according to this business-cycle benchmark.
Meanwhile, the New York Fed’s Weekly Economic Index rose to the highest level of the year, based on data through Sep. 16. The relative strength suggests that the weaker August profile is on track to stabilize and possibly rebound this month.
This week’s issue of The US Business Cycle Risk Report also paints a relatively upbeat picture of economic activity through August. The Economic Trend Index (ETI) and the Economic Momentum Index (EMI) are above their respective tipping points that indicate an NBER-defined recession – 50% and 0%, respectively, as shown in the chart below.
In recent weeks I’ve been advising subscribers to The US Business Cycle Risk Report that this year’s rebound in US economic activity appears to be peaking. Notably, the forward estimates of ETI and EMI look set to hold steady and dip, respectively.
This could be another head fake so it’s crucial to carefully monitor incoming data and how the updates influence ETI and EMI, along with other business-cycle indicators. Even if the US economic rebound this year is flatlining, that alone doesn’t mean recession is imminent. Rather, it could simply reflect that the near-term trend will align with moderate but stable growth. For the moment it’s unclear what happens next, although it’s safe to say that the US economic resilience through much of this year looks vulnerable in Q4.
One risk factor is the rising threat of a government shutdown that appears set to start this Saturday (Oct. 1). Add in rising Treasury yields – the 10-year yield rose to 4.55% yesterday (Sep. 25), a 16-year high — and conditions may be turning negative to the point of pushing the economy over the edge at some point in the months ahead.
But it’s too early to declare that the expansion is ending. It’s easy to speculate, of course, and there are some useful talking points on that front if you’re so inclined to paint a dark picture.
A better approach is to let a diversified mix of data do the heavy analytical work. Meanwhile, the pundits will continue to practice their macro entertainment acts, which can be an amusing but otherwise useless diversion as they attempt to divine the future in 2024 and beyond.