Calling a US recession has been a bit like “Waiting for Godot”, the title of the 1953 play by Samuel Beckett. US data has remained resilient, especially the labour market, despite deeply inverted yield curves, which historically have tended to portend a recession within the next 13-19 months. At the same time the S&P500 has rallied back to be within 5% of its all-time high, having rallied 27% from its low.
In this note we update our recession probability models that we last ran back in 2019 when there was debate around whether the US was heading into a recession (of course a recession did hit in 2020, but because of the pandemic). The models we run are probit models, where the dependent variable is defined by NBER recession dating (1 is a recession, 0 is not); the resulting output gives a recession probability.
In terms of yield curves, we find that curves are consistent with a 50-75% chance of a recession, with those curves giving a 13–19-month lead. Given the lead, it is worth noting the probability that the month of July 2023 is in recession is much lower at 4-6%, with this rising to 40% by end 2023, and lifting to above 50% by early-2024. These results are unsurprising given curves are the most inverted since the 1980s.
Other financial variables give a much lower probability of a recession, but note the lead given by these other variables is at most 2-3 months. The most notable is the S&P500, where given the selloff in 2022 the implied recession probability hit a high of 48% at one stage but given the sharp equity rally since it has fallen dramatically and currently stands at 6.2%. Contained high yield spreads signal only a 1% probability.
Sentiment indicators suggest a higher probability. The NFIB Survey sits at 39.2%, the ISM Manufacturing at 44.3%, and the ISM Services at 2.9%. Consumer measures are in-between at 26.5% when using the Uni Michigan Survey. Real activity variables such as Jobless Claims give 11.0%, Building Permits 15.3% and Retail Sales 5.4%.
Overall, we conclude that there is a low likelihood of the US being in a recession as at July 2023. However, the inverted yield curve remains consistent with a flashing amber recession signal, with this extending into early to mid-2024. To date the services sector has been resilient, though as price pressures and margins ease, more pressure may build on the services side. Two variables to track closely based on our analysis are Jobless Claims and the Services ISM.