Wall Street’s biggest banks are scouring U.S. data for signals of an impending recession. On balance, they’ve been finding that a 2019 downturn still isn’t likely -- though it’s becoming slightly more so.
The current expansion is eight months away from becoming the longest in postwar history. Most indicators remain solid enough to suggest it’ll get there. But the sell-off in stocks and an inversion in part of the bond yield curve has analysts parsing the tea leaves for anything that points to a contraction in 2019.
Economists at JPMorgan Chase & Co, Goldman Sachs Group Inc., UBS Group AG and Bank of America Corp. are among those who’ve joined the hunt in their recent research notes.
JPMorgan sees a 35 percent chance of a recession next year, close to the highest probability in the current cycle, and up from 16 percent in March. Globally, UBS studied 40 countries over about 40 years and found the U.S. to be among those currently behaving in a way inconsistent with prior peaks.
So if a downturn is creeping into the realm of possibility, it’s hardly the base-case scenario. The alarm bells that usually ring when a recession is imminent are doing a muted job of signaling one. Several indicators are slowing down, but economic data have yet to fall off a cliff.
Alarm Bell 1: Jobs Data
Initial jobless claims are among the five most relevant indicators of a coming slump, according to Bank of America economists. “In the last seven recessions, the 6-month growth rate of initial claims has, on average, jumped double digits heading into the recession,” they wrote.
Claims are heading slightly higher on a weekly basis of late, data published Thursday confirmed, but they’ve been at extraordinarily low levels and their recent pop has been relatively small.
Friday’s November jobs report also showed that job gains had slowed slightly. Still, unemployment is very low, wage growth is finally above 3 percent, and the participation rate is stable. “We can’t ignore the pickup in claims, but I don’t think it’s a decisive enough shift to conclude that the labor market is slowing in a troubling fashion,” said Michelle Meyer at Bank of America.
Bank of America’s other top recession signals are auto sales, industrial production, the Philadelphia Fed index, and aggregate hours worked. Some of those are weakening, but none are falling off a cliff. Meyer said her team’s market-based recession indicator shows a 20 to 30 percent probability of a 2019 downturn, while their gauge based on economic data puts the chance at less than 10 percent over the next 6 months.