US Business Cycle Risk Report - Thursday, Feb. 21

The US economic trend continues to slow, but the deceleration – so far – has been gradual and non-threatening in terms of raising recession risk to a critical level. In other words, moderate growth prevails, albeit with a downside bias. If the deceleration rolls on, the potential for trouble may become elevated in the second half of 2019.

The critical question in the months ahead boils down to: Is the economy suffering from a soft patch that will stabilize or give way to reacceleration or are we in the early stages of an approaching recession? At this point, it’s too early to know which scenario will unfold. Meantime, the case is weak for arguing that a downturn will begin in this year’s first quarter.

What is clear is that growth peaked in mid-2018 and the slowdown is ongoing. Next week’s delayed 2018 fourth-quarter report on gross domestic product (GDP) is expected to reaffirm this analysis. The Wall Street Journal’s February survey of economists indicates that Q4 growth is on track for a 2.5% gain — down from Q3’s 3.4% and Q2’s 4.2%.

The slowdown looks set to continue in this year’s first quarter, according to the current nowcast from Now-casting.com. The firm’s Feb. 15 estimate is a sluggish 1.8% for Q1 GDP growth — the softest quarterly pace in two years.

To be fair, it’s still early for developing confidence about Q1, but The Capital Spectator’s revised trend analysis restates a theme that’s been consistent on these pages for months (see here, for instance): economic activity is easing. The good news: there’s a low probability that a new NBER-defined downturn started in January, according to analysis of a diversified set of economic indicators shown in the table below. (For a more comprehensive review of the macro trend with weekly updates, see The US Business Cycle Risk Report.) Today’s macro profile — no recession as of January — will likely be confirmed in next week’s January update (due on Monday, Feb. 25) of the Chicago Fed’s National Activity Index (via the three-month average).

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