US Recession Risk Remains Low - For Now

investing.com:

Some analysts who favor one or two indicators to forecast US recessions have had a rough year. The reliance on a generally robust predictor may yet prove its worth in the months ahead. But so far the months-long calls by some pundits that recession is near have been wrong, or at least premature.

There’s always another recession approaching, of course, but the timing aspect is the tricky part. Some of the forecasts have relied on what has long been celebrated as a so-called flawless predictor: the US Treasury yield curve. The historical record, numerous studies point out, show that when long rates fall below short rates, economic output turns negative in due course.

But while the 10-year-less-3-month spread turned negative nearly a year ago, the US economy continues to expand and the odds remain low that an NBER-defined recession has started or is imminent.

Some recession forecasters have doubled down on the recession call and now say they’ll be vindicated by the start of a downturn in 2024. Maybe, but it’s useful to review some simple truths about analyzing the business cycle.

First, looking beyond a few months is effectively a coin flip. The US economy rarely turns on a dime, short of an exogenous shock, such as the pandemic that hit in 2020. Otherwise, it’s reasonable to run some basic modeling to nowcast the current scenario and make some reasonable projections about how output will evolve over the next 2-3 months. Beyond that, there are just too many factors that are unknown to confidently assess what could happen, or not.

Second, relying on a handful of indicators is asking for trouble. The yield curve is a valuable metric and it has an impressive track record of anticipating recessions. But every indicator fails at