US Business Cycle Risk Report - Friday, Dec. 21

It’s always difficult to know exactly why the stock market is falling (or if a decline is even based on a reasonable interpretation of macro events). But it’s a safe bet that rising investor anxiety over the outlook for the US economy is a contributing factor in the recent slide. It’s debatable if the haircut is overdone, although it’s clear that an attitude adjustment on US economic prospects is front and center in the crowd’s thinking.

Estimates of near-term growth have softened lately, such as this week’s review of nowcasts for the upcoming fourth-quarter GDP report. Yet recession risk remains low, based on the data published to date. The near-term outlook offers a similar profile. In short, the deceleration in the macro trend for the US doesn’t appear destined to deteriorate into a contraction in the immediate future, at least not yet.

The macro calculus could change, of course, depending on the incoming data. But using the results available today strongly suggests that there’s still a healthy tailwind, albeit a tailwind that’s lost momentum lately.

Surprising? Not really. The Capital Spectator’s read on the numbers has been noting for several months that US growth has peaked (see here and here, for instance). The latest run of data continues to support this view. The same can be said for projecting slower but still-moderate growth for early 2019. Leaving aside the dubious game of speculating on what might happen deep into next year, it’s fair to say that the numbers available right now (along with cautious near-term projections of the macro trend) continue to anticipate that a moderate expansion will prevail.

Let’s start by looking at what just happened. A broad set of indicators reflects a virtually nil probability that a new NBER-defined downturn began in November. (For a more comprehensive review of the macro trend with weekly updates, see The US Business Cycle Risk Report.) Based on this data, the Dec. 24 update of the Chicago Fed’s National Activity Index (via the three-month average) for November will likely confirm that recession risk remained low last month.

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