Alarm Bell 2: Business Surveys
Business sentiment gauges have softened recently, and that’s one reason for the increase in JP Morgan’s recession-predicting index, which is “getting close to the highest levels of the expansion so far,” analyst Jesse Edgerton says. The cycle peak came in 2016 when growth and markets wavered.
“The risks are drifting toward the economy being softer,” Edgerton says, though he adds that surveys aren’t uniformly weak, and his team still isn’t predicting a 2019 recession. He’ll be focused on high-frequency data, including the regional Fed business reports, for an up-to-date picture of activity.
Alarm Bell 3: Yield Curve
Much ink has been spilled about the recession-predicting magic of a yield curve inversion -- a situation in which rates on short-dated debt securities move above those on longer-maturity bonds. The closely-monitored gap between 2-year and 10-year yields has been narrowing, and a less fashionable portion of the yield curve has already inverted.
When the yield curve flips, a downturn usually follows. “We hardly have any empirical regularity that’s this regular,” San Francisco Fed President Mary Daly said in a November interview.
That said, Fed officials so far don’t sound overly concerned about the curve. They’re monitoring it, but they aren’t willing to focus on it exclusively so long as real economic data hold up.
There’s a reason for their reticence. Inversions are a “flawed crystal ball,” UBS Global Wealth Management’s Chief Investment Officer Mark Haefele wrote in a Dec. 5 note. While a flip in the 10-year and 2-year curve preceded each of the past seven recessions, the lag was longer than 24 months on the last two occasions.
The Summary Measure
One of the widest measures of what economists expect, the Fed’s Survey of Professional Forecasters, shows that they’re starting to sour on the economy’s prospects four quarters from now. But their pessimism might be too remote to mean much.