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U.S. Recession a Coin Toss as Chances Climb to 53% Within Year
The coronavirus that sent financial markets reeling is poised to exact a larger toll on the U.S. economy in the coming months and possibly threaten the record-long expansion.
53%
Chance of Recession Within 12 Months
Bloomberg Economics created a model to determine America’s recession odds. The chance of a recession within the next year now stands at 53%, the highest reading since the U.S. exited the Great Recession in June 2009 and significantly higher than the 24% seen in the prior month. The latest update combines February reports, estimates for other figures not yet released for the month, and financial markets data from early March.
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The recession probability model developed by Bloomberg economists Eliza Winger, Yelena Shulyatyeva, Andrew Husby and Carl Riccadonna incorporates a range of data spanning economic conditions, financial markets and gauges of underlying stress.
The surge in the recession probability reflects a sharp deterioration in financial conditions that began in mid-to-late February. As the number of cases -- and deaths -- from the rapidly spreading coronavirus increased, stocks plummeted and credit spreads widened. The market suffered yet another blow after a collapse of OPEC+ talks led to a price war between Russia and Saudi Arabia, sinking oil prices.
In contrast with financial market data, initial readings of economic data for February remain positive. The unemployment rate returned to a 50-year low as hiring at U.S. companies remained strong.
While monthly measures of consumer confidence have held up, Bloomberg’s weekly gauge has declined to its lowest level of the year. The Conference Board’s gauge hit a six-month high in February and the University of Michigan’s measure climbed to its best reading in almost two years.
Still, as the virus spurs more and more cancellations of travel, conferences and large events, economic indicators may deteriorate. This could push the model’s probability of recession even higher in the coming months.
Forecasting just when a recession will begin is notoriously difficult, but as a downturn nears, indicators flash clearer warnings. Still, it’s important to keep in mind since market volatility drove the jump in probability, it should be interpreted with caution. At times the model has raised false alarms, like when it hovered just below 50% in December 2018.
Because different indicators show signs of strain at different points, the heat map below reflects the chance of a recession at various points in time, with each focusing on a different set of indicators.
For instance, the reading on whether the U.S. is on the immediate cusp of recession is based in part on weekly filings for unemployment benefits. At the three-month mark, the model focuses on financial-market variables like the spread between three-month Treasury bills and 10-year notes. Six months ahead, the Leading Economic Index takes a starring role. Looking further out, the focus is on imbalances that play out over longer periods, like corporate interest costs relative to profits.
Federal Reserve policy makers slashed interest rates by half a percentage point in early March after the coronavirus and its possible fallout sent stocks tumbling. It was the first such emergency move since the 2008 financial crisis. U.S. stocks moved higher immediately following the rate cut before resuming their slump.
Traders in the federal funds futures market are betting that the central bank will cut rates by at least a half percentage point more by the end of this month. Such a move would leave the Fed with little interest rate ammunition to expend should a recession develop.
Many define a recession as two consecutive quarters of negative growth. The official dating committee at the National Bureau of Economic Research takes a more holistic approach, defining a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months.” As the chart below shows, not all recessions are created equal. Coming with a financial crisis attached, the latest downturn was especially protracted and deep. Previous recessions have been shorter and shallower.
Recessions are usually accompanied by a swift increase in the unemployment rate. The jobless rate differs greatly between downturns depending on the breadth and severity of the recession. While unemployment peaked at 10% in 2009, and rose even higher in the early 1980s, other downturns have brought still-painful but smaller increases in the jobless rate.
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