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In the bewildering labyrinth of economic forecasts, UBS Global Research emerges with a fresh take on the U.S. recession probability—down to 53% in July from a more daunting 60% just months ago. But before you breathe a sigh of relief, let’s delve into the tempestuous sea of data that paints a picture of cautious optimism mixed with brewing uncertainty.
A Rollercoaster of Expectations
Yes, the numbers have nudged downwards, but don’t be fooled. This is no cause for unbridled celebration. The economy, once roaring at over 3% growth in 2023, is now limping along at a paltry 1.5% as we stumble towards the end of 2024. The storm clouds of economic slowdown are gathering, and even though UBS has eased off its recession call since spring, the threat remains very real. The specter of a downturn hasn’t vanished; it’s merely lurking, waiting for the right moment.
The Fragile Balance
UBS’s analysts, with an air of measured concern, highlight that while the data hasn’t worsened significantly, it’s far from comforting. The economy is on shaky ground—think of it as a tightrope walker balancing precariously, with each new piece of data threatening to tip the balance.
The UBS model, a complex beast that crunches 16 leading hard data indicators, shows a picture of stagnation. No significant deterioration, no miraculous improvement—just a haunting stillness. As of June 2024, the average of these indicators hovers just below zero, a telltale sign that while the economy hasn’t plummeted, it’s certainly not soaring either. The implied recession probability from this model? A nerve-wracking 80%, slightly down from earlier in the year, but still ominously high.
The Longest Sigh of Relief—or the Calm Before the Storm?
Here’s where things get downright bizarre. The current phase of economic contraction has stretched on for 28 months without a full-blown recession—an unprecedented streak. To put that in perspective, before the Global Financial Crisis, the contraction phase lasted 20 months, with recessions usually declared after just 12. What does this mean? Are we defying economic gravity, or simply postponing the inevitable?
It seems that while some sectors—especially those sensitive to interest rates—are in the doldrums, the resilience of consumer spending has kept the wolf from the door. But don’t get too comfortable; the strength of consumer wallets might not hold out forever.
The Yield Curve
Ah, the yield curve—a crystal ball for economic soothsayers. Inverted since July 2022, it’s been flashing red for an impending recession. And yet, the U.S. economy soldiers on. The probability of a recession based on this twisted curve dropped to 50% in July 2024, down from 60% in spring and a terrifying 90% a year ago. This easing is reflected in a slight shallowing of the inversion, particularly in the 2 to 7-year maturity range. But make no mistake, this isn’t your typical yield curve inversion. It’s a historical outlier—longer than any other without a recession—and it’s leaving experts scratching their heads. Is this the new normal, or are we simply on borrowed time?
Credit Markets
UBS isn’t just watching the yield curve; they’re also peering into the murky depths of credit markets. Here, the recession probability holds steady at 28%, a figure that has been stubbornly consistent since it started climbing in mid-2022. While lower than the harrowing predictions from hard data and the yield curve, this still signals an underlying fragility that shouldn’t be ignored.
The Consumer
So, what’s keeping the economy afloat? Look no further than the American consumer, particularly the upper-income households, flush with cash and buoyed by positive wealth effects. But here’s the kicker—this resilience is a double-edged sword. As fiscal support fades, the economy’s heavy reliance on consumer spending makes it vulnerable to shocks. And with the labor market showing signs of cooling, the path ahead is anything but clear.
UBS’s final word? Stay vigilant. The numbers may be softening, but the risk of recession is still hovering like a storm cloud on the horizon. This is no time for complacency—every data point could be the one that tips the scales.
