USA: What do our recession models say?

The Fed is no longer focused on neutral monetary policy, as it was a few months ago, but on openly restrictive policies to mitigate domestic demand, credit and, ultimately, prices. At first glance, this increases the risk of recession. In our battery of models, most are currently silent on this risk, but two are already on standby (oil, stock market). The labor market is showing some signs of weakness, but it is doubtful that this will continue, as the economy is suffering from the ongoing energy crisis, aggressive monetary tightening and the downturn in the construction sector.

Focus on the United States Bruno Cavalier, chief economist and Fabien Bossi, economist

One wise man once said that forecasting is a difficult art, especially for the future. When analyzing economic cycles, it is difficult to predict the present. First, the recession is volatile. Of course, there are the necessary conditions that we know how to determine, as a rule, the excess of costs financed in the loan, but the trigger may occur suddenly. The transition from the expansion phase to the recession phase is a nonlinear process. Second, near the inflection points of the cycle, the data is often mixed, not all good or all bad, which leads to false signals. That is why the committee responsible for the official dating of American cycles is in no hurry to express its opinion, even if it means announcing the beginning of a recession when it is over. You may be tempted to choose numbers to confirm your preview. Thus, the vast majority of Americans say that the economy is already in recession on the grounds that inflation has reached a four-decade high (see Focus-US June 10: “Cognitive dissonance of Americans). Of course, it is possible that the inflation shock will reduce real incomes so much that it will lead to a collapse in demand, rising unemployment and, ultimately, a recession, but this is not the case now.

In order not to be confirmed by this bias, we have updated a large panel of models that estimate the likelihood of a recession in the US economy without trying to estimate them. There are overlapping and advanced models. The former are built on variables that historically correlate well in real time with the economic cycle. The second concerns the twelve-month horizon.

2022.06.20.  Probability of decline by different models
USA: probability of recession according to different models

In the group of matching models, the first takes the unemployment rate as an explanatory variable. Indeed, it is no exception that the recession began when unemployment rose by at least half a point for three consecutive months. To date, unemployment in the United States is still declining. In the second case, we consider a change in weekly unemployment claims, a variable that is more volatile than unemployment but is better able to detect changes in the labor market immediately. We then examine the signal coming from the stock market (S & P500 index) – with the caveat that the stock market always changes before a recession, but it also sends a lot of false signals. Finally, we note the evolution of building permits, as the residential real estate sector usually responds to changes in interest rates. In mid-2022, of these four models, only the stock market model sends a sharply negative signal with a 62% probability of recession.

Then we look at five models that signal a turn in the real economy. The latest available data allow us to estimate the probability of a recession by mid-2023. The first is the canonical model of interest rate spread, which is measured here by the difference between the yield on 3-month treasury bills and 10-year bonds. This spread is close to 180 bp, far from the inversion of the curve (other possible configurations give a more negative signal, for example, the cut of the rate for 2-10 years). Another model examines whether the weakening of activity data is diffuse or sectoral. A typical recession affects the whole territory, most industries and economic entities. Our other three models take as an explanatory variable, respectively, the evolution of the credit premium to companies, the price of oil and the profitability of companies, measured here by national accounts. Here, the only really negative signal at this stage comes from the oil market, which gives a probability of recession well above 50%.

Here are the results. How to interpret them? A generalized review can lead to a reassuring observation, as the vast majority of models do not send a warning signal. We tend to read darker. As noted above, there are nonlinearities. In our claims model, the probability of a recession is low (6% in June), but if their level remains unchanged in July, we will suddenly go over 90%, as this will confirm that we have changed phase by moving from reduced claims to claims growth. .

In addition, the three most common factors causing the recession are present at the same time, and all of them are likely to worsen in the short term, namely the energy crisis, tight monetary policy and instability in the real estate sector.

06/20/2022  The impact of oil prices on growth
USA: the impact of oil prices on growth

The rise in oil prices is so great that it could reduce real GDP growth in the second half of 2022 by two points year on year, which has never been seen outside the recession (schedule). The shock is not as strong as in the 1970s or during the Gulf War, but this time there is additional tension over gas prices. This intensifies the energy shock.

Moreover, the restrictive position of the Fed continues to strengthen, as shown by the latest decision of the FOMC (see page 3). The current bond crash has no amplitude since 1994, but it is still very brutal.

06/20/2022  Developers' attitudes towards home sales
USA: developers’ attitudes towards home sales

Finally, the real estate sector can no longer support the trends that emerged from the boom that began at the end of the pandemic. From now on, due to the combined effect of rising house prices (approximately + 20% per year) and mortgage rates, the monthly payment on the average loan has increased by 50% in one year, which has not been heard since 1980. promoters, sales prospects are in free fall (schedule). Unlike the sub-standard bubble, households do not have excessive debt and appear to be shielded from the clean-up phase, but activity in the sector will continue to decline, with negative macroeconomic consequences.

The US economy is emerging from an atypical crisis. We must never forget this moment when we compare the current cycle with the cycles of the past. The pandemic and the current energy crisis show that there is a need for investment to overcome supply constraints. If the loan does not stop suddenly, it can mitigate the effects of demand adjustment, but does not cancel it.


CPI report p maybe was such a shock that the Fed decided to raise the rate by 75 basis points (see below). Everyone expected that inflation would remain high, but would not set a new record in this cycle at 8.6% for the year. Energy prices have jumped (+ 3.9% m / m) – expect much worse June as gasoline prices continued to rise. Pressure on food prices has intensified, again, with no hope of easing. Perhaps more serious in the eyes of the Fed is that the growth of base prices is not slowing down, reaching + 0.6% in May against 0.5% per month since the beginning of the year. Some prices for services increase for one-time reasons (leisure, travel), others reflect more constant forces (actual and imputed rent, which weighs almost a third of the CPI). Inflation shock affects the morale of households. in June, according to a preliminary estimate by the University of Michigan poll, consumer sentiment fell again (-8 points), exacerbating the decline that began in the spring of 2021 (-38 points in total). This index is at a historically low point, even lower than during the Walker decline in the early 1980s. Over time, while inflationary pressures remain strong, households are revising their inflation expectations upwards, not only in the short run (+ 5.4% once a year), but also in the medium term (+ 3.3% at 5- 10 years). This result could also play a role in the Fed’s decision to strengthen its monetary response.

As a logical consequence, household consumption is declining, but at this stage it is not a stop. in maybe, retail sales fell by 0.3% m / m. The decline in car sales, which has been going on for three months in a row, is partly to blame. The base sales index (control group), which excludes certain volatile items, was also weak, barely stable, while the last few months have been revised downwards. It will be recalled that retail sales have a strong price effect. Given this effect, consumption of goods will decrease by more than 2% year on year 2nd quarter of 2022 according to the Atlanta Fed. Expenditures on services, twice the cost of goods, still continued to grow at a good pace (+ 5.3% qoq). In short, the Atlanta Fed describes an interesting situation where domestic demand remains stable, but real GDP growth is hampered by the negative contribution of foreign trade and reserves. Already in the first quarter of 2022, final domestic demand grew by about 3% yoy, while real GDP fell by 1.5%.

As for the morale of the business, the recent trend indicates a decline, but with significant differences between sectors. In the construction of houses, oddly enough, given the rising rates, the amendment is very clear. The NAHB index fell 2 points June, 17 points in six months. Several regional production indices hold up better (recovery of the NY Empire index, erosion of the Federal Reserve in June) and signal moderate supply chain disruptions.

Monetary and fiscal policy

The Fed has told markets to raise rates by 50 basis points. During the weekend, Jerome Powell switched to the + 75bp option and enabled fed-observer Wall Street Journal, where it was posted June 13 which leads to a change in expectations. Therefore, the decision of the FOMC did not surprise anyone. Funny note: a single vote against +50 bp. came from Esther George (Kansas City), who is considered the wisest of all FOMC members. For the July meeting, Mr. Powell has not yet decided between +50 and +75 bp.

Continuation of this week

Jerome Powell will appear before Senate committees ( 22) and House ( 23) submit a semi-annual report on monetary policy. According to statistics, the June PMI survey will be conducted ( 23) and data on the real estate sector (sales of existing homes on 21 and new homes 24).