US Business Cycle Risk Report - Thursday, July 18

How slow can it go before slipping into recession? Economic growth in the US has decelerated in recent months and there are new signs in today’s update that the macro trend is at risk of continuing to lose speed (gradually) in the months ahead. Thus the critical question: Where does the tipping point lie? Unclear, although the potential for trouble is creeping higher.

Using the latest numbers, today’s update shows that the slowdown continued to deteriorate (slightly) vs. last month’s update. Notably, the June profile’s near-term projection reflected the possibility of a mild reacceleration in growth. A month later, the prospect for a rebound in the trend has faded, based on today’s revised economic profile. As shown in the last chart below (Economic Trend Index: Actual Vs. Estimates), this month’s update reflects a fractionally softer outlook for the US economic trend, in the wake of the latest economic releases.

The good news is that an NBER-defined recession hasn’t started and is unlikely to kick in for the immediate future (through August). Looking into September and beyond is considerably less clear and so the possibility can’t be dismissed that the macro trend will deteriorate further in the final months of the year, perhaps to the point of triggering a new downturn.

For now, slow growth remains the working assumption, a view that’s based solely on the numbers published so far (along with some cautious modeling for projecting the missing data and looking ahead through August). Echoing this view is a nowcast for the upcoming second-quarter report on gross domestic product (due on July 26) that expects a substantially softer gain vs. Q1’s strong 3.1% advance. As reported by The Capital Spectator last week, the median estimate for Q2 GDP growth (based on a set of nowcasts) calls for a weak 1.7% increase. More recent estimates remain in line with that outlook, including yesterday’s revised GDPNow model (via the Atlanta Fed), which projects a sluggish 1.6% gain in output for the April-through-June period.

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