While the elevated risk of a recession persists, the report indicates that recent economic data have not significantly worsened, suggesting a somewhat stabilized outlook.
“While we dropped our recession call in the spring, we have been consistently highlighting that the economy was undergoing a significant slowdown (from over 3% growth in 2023 to around 1½ in 2024 (Q4/Q4)),” the analysts said.
This slowdown has raised concerns among market participants, particularly following disappointing employment data.
However, despite these concerns, UBS maintains that the probability of a recession, while elevated, has not shown any abrupt changes.
UBS tracks 16 leading hard data indicators to gauge economic health. As of June 2024, these indicators suggest a continued sideways movement, with no clear upward or downward momentum.
The aggregate hard data factor, which measures the average of these indicators, has remained just below zero, indicating a lack of significant improvement or deterioration. The implied recession probability from this model stands at 80%, slightly lower than earlier in the year but still concerningly high.
Interestingly, the current contractionary phase of the hard data cycle has lasted for 28 months, making it the longest such period without triggering a recession. Historically, the pre-Global Financial Crisis (GFC) contraction phase lasted 20 months, with an average of 12 months before a recession was declared by the National Bureau of Economic Research (NBER).
This prolonged period of contraction without a recession suggests that while certain interest-sensitive and cyclical sectors remain weak, overall consumer strength has so far mitigated the risk of a downturn.
UBS also assesses recession risk by analyzing the slope of the yield curve, a key indicator of market expectations for future economic activity. The yield curve has been inverted since July 2022, a traditional signal of an impending recession.
However, the probability of a recession based on the yield curve has decreased to 50% in July 2024, down from 60% in the spring and 90% a year ago. This decline reflects a slight easing in the depth of the yield curve inversion, particularly in the 2 to 7-year maturity range.
The yield curve’s prolonged inversion without a subsequent recession is unusual, marking the longest such period on record. This anomaly may indicate that while the signal remains concerning, other factors, such as strong consumer spending and labor market resilience, are helping to stave off a recession.
UBS also monitors credit market indicators, including leverage and interest coverage ratios, and data from the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS).
The recession probability from these credit market indicators currently stands at 28%, a level that has remained relatively stable since it began rising in the second quarter of 2022.
While this probability is lower than those derived from hard data and yield curve models, it still underscores the fragility of the current economic expansion.
The U.S. economy’s resilience has largely been supported by strong consumer spending, particularly among upper-income households benefiting from positive wealth effects and ample liquidity.
However, UBS warns that as fiscal support diminishes, the economy’s reliance on this consumer strength makes it vulnerable to shocks. The labor market’s gradual slowdown, while in line with UBS’s projections, adds to the fragility of the expansion, emphasizing the need for cautious optimism.
Source: Economy - investing.com
