Recession Monitor – US recession odds continue to fall

Our probability of recession models are approaching their zero bound and are at their lowest levels in more than two years, as leading indicators signal an encouraging outlook.

What you will learn:

• Revisions to personal income data showed lower-than-estimated savings by consumers, but we aren’t overly concerned. Consumers haven’t shown a corresponding slowdown in spending, while healthy balance sheets and strong wage growth remain supports.
• A larger correction in financial markets could dent spending from households due to the wealth effect. We’ve modeled the impact of a 20% decline in equity markets, and while the impact to consumption wouldn’t push the economy into recession, GDP growth would slow markedly and the unemployment rate would move to 4.5% in the first half of next year.
• A cautious signal from the Federal Reserve toward rate cuts next year, alongside rising risk premia from investors, sent yields 30bps higher along the curve last week. Higher interest rates will weigh on the housing market, temper the rebound in manufacturing, and reduce the incentive to build inventories ahead of potential tariffs.