Recession risk for the US remains low at the moment, but the signs are piling up that economic growth is slowing. The nine-year-old expansion will remain intact through the end of the year and persist into the early months of 2019, but next year’s second quarter-plus looks wobbly.
As The Capital Spectator has been pointing out for several months, the data is telling us that growth has peaked (see here and here, for instance). Deciding what this means going forward, however, is still open for debate.
Let’s remember that looking ahead beyond two to three months at most is highly speculative and so a high degree of caution is required for making assumptions beyond January. Meantime, the numbers in hand strongly suggest that we’ll see a softer round of growth for the final quarter of 2018. The rate of increase through the end of this year into the first month or so of 2019 is set to remain strong enough to keep recession risk low. The question is whether the downshift underway will continue? It’s too early to answer with any confidence at this point, but it’s also premature to rule out the possibility of increasingly softer growth, perhaps bordering on stagnation (or worse) at some point in the new year.
In any case, close monitoring of the incoming data is a high priority in the search of early, high-confidence signals for evaluating recession risk.
Meanwhile, reviewing a broad set of indicators today continues to estimate a virtually nil probability that a new NBER-defined downturn started in October, according to analysis of a diversified set of economic indicators. (For a more comprehensive review of the macro trend with weekly updates, see The US Business Cycle Risk Report.) Based on this data, Monday’s October update of the Chicago Fed’s National Activity Index (via the three-month average) will likely confirm that recession risk remained low last month.
Aggregating the data in the table above continues to indicate a positive trend overall through last month, albeit a trend that’s been decelerating through most of this year. Despite the slide, the Economic Trend and Momentum indices (ETI and EMI, respectively) remain well above their respective danger zones (50% for ETI and 0% for EMI). When/if the indexes fall below those tipping points, the declines will mark warning signs that recession risk is elevated and a new downturn has started or is near. The analysis is based on a methodology that’s profiled in my book on monitoring the business cycle.
