US Business Cycle Risk Report - Friday, Jan. 18

The odds are still low that a new US recession has started, but economic momentum continues to slow. The headwinds remain moderate so far, but the potential for trouble later in the year is rising, in part due to the partial government shutdown.

US economic activity was already decelerating before the political stalemate began late last month. In early December, for instance, The Capital Spectator reported that gross domestic product (GDP) in the fourth-quarter was on track to post a moderately softer growth rate vs. Q3. This week’s update of the Q4 outlook still reflects a slowdown, although the estimated 2.8% increase suggests that the economy ended the year with a decent tailwind.

Today’s economic profile continues to reflect low recession risk, but the combination of a decelerating macro trend that began in last year’s second half and the ongoing government shutdown imply that output will remain on downward trajectory for the near term.

Meantime, economic analysis will become increasingly challenges because key economic reports are no longer being updated, courtesy of the political chaos in Washington. This week’s scheduled retail sales and housing starts for December, for example, remain a mystery. (Housing data from BuildFax suggests that residential construction fell last month.) To fill in the missing data points until the government resumes its regular economic updates The Capital Spectator will rely on estimates generated by an ARIMA model.

Meanwhile, the available numbers still point to a positive but slowing economic trend. A broad set of indicators reflects a virtually nil probability that a new NBER-defined downturn began in December. (For a more comprehensive review of the macro trend with weekly updates, see The US Business Cycle Risk Report.)

Aggregating the data in the table above continues to indicate a growth trend overall through last month, although the strength of the expansion weakened — again — in December. Despite the deceleration, the Economic Trend and Momentum indices (ETI and EMI, respectively) remain moderately 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 outlined in my book on monitoring the business cycle.

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