As the economy stalls out with dismal GDP and employment data, it is no surprise that JPMorgan is now seeing its recession indicators hitting new highs.
JPM says that the probability of a recession beginning within 12 months has moved from 30% on May 5th, to 36% today…
Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today (Table 1, bottom row and Figure 1, blue line). This marks the second consecutive week that the tracker has reached a new high for the expansion.
Also, JPM’s models based on financial market pricing is now indicating a risk of recession
With the rally in risk markets over the last month, our models based on financial market pricing now see a recession risk moderately below our model based on macroeconomic data (Table 2).
Since last week, we have seen disappointments in the Dallas Fed measures of manufacturing and nonmanufacturing sentiment, the ISM nonmanufacturing index, and the Conference Board measure of consumer confidence. Of course, there was some positive news as well, with the manufacturing ISM and auto sales both showing slight improvements.
This morning’s employment report also raised the recession probabilities, although for counterintuitive reasons. We do not include the payrolls number in the recession model because it is subject to larger revisions than other labor market data. But the unemployment rate enters the model in two ways. As a near-term indicator, we watch for increases in the unemployment rate that occur near the beginning of recessions. So this morning’s move down in the unemployment rate lowered the recession probability in our near-term model. But we also find the level of the unemployment rate to be one of the most useful indicators ofmedium-term recession risk. So the move down in unemployment raises the model’s view of the risk of economic overheating in the medium run and raises the “background risk” of recession.
