As 2018 is drawing to a close, US financial conditions are tightening. And the Wall Street’s biggest banks are now scouring US data for signals of an impending recession.
JPMorgan sees a 35% chance of a recession next year, up from 16% in March. Globally, UBS has studied 40 countries over about 40 years and found the US to be among those currently behaving in a way inconsistent with prior peaks.
US initial jobless claims are among the five most relevant indicators of a coming slump, according to Bank of America economists. Claims are heading slightly higher on a weekly basis of late, but they’ve been at extraordinarily low levels and their recent pop has been small.
Business sentiment gauges have softened recently, and that’s one reason for the increase in JP Morgan’s recession-predicting index, which is “getting close to the highest levels of the expansion so far.”
Then comes the recession-predicting magic of a yield curve inversion – a situation in which rates on short-dated debt securities move above those on longer-maturity bonds. The closely-monitored gap between 2-year and 10-year yields has been narrowing, and a less fashionable portion of the yield curve has already inverted.
That said, the Federal Reserve officials so far don’t sound overly concerned about the curve.
The Fed’s Survey of Professional Forecasters shows that they’re starting to sour on the economy’s prospects four quarters from now. But their pessimism might be too remote to mean much.
To be sure, several US economic indicators are slowing down, but economic data have yet to fall off a cliff.
Bad news has kept coming as the global economy is headed into the final stretch of 2018 with a weakened momentum.
Emerging markets are buckling under the weight of a strong dollar; the eurozone is growing at its slowest pace in over two years; Germany’s economy contracted in the third quarter, Japan’s economy shrank at an annualised rate of 2.5% in Q3; and Britain is being battered by Brexit chaos.
On top of that, China, the engine of global growth for the past 15 years, is growing at its slowest pace in a decade.
The question is whether the US can resist the downdraft, providing a balance for the rest of the world. While there are reasons to hope it can, most economists forecast US growth will ebb a bit in 2019 on the back of protectionism, higher interest rates and the fading support of tax cuts.
Americans will begin feeling the effects next year of a marked slowing in world economic growth but should be spared a new recession, the chief economist of the International Monetary Fund has said.
As the Donald Trump administration ramps up debt sales to cover a budget deficit projected to hit $1tn next year, a potent mix of a strong dollar, weak stock markets and flat yield curve squeezing the availability of global money that will bring to an end the Fed’s rate-hiking cycle sooner rather later.
The US economy has been remarkably stable this year, impervious to the deterioration across much of the rest of the world; that may change next year.
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