The New York Federal Reserve Bank uses a probability monitor to help calculate the odds of a possible recession in the next twelve months. This specific probability monitor hit 32.9% in June 2019, the highest level since 2009.
This current 32.9% reading, up from 28% in May 2019, comes on the heels of “…the US’s 10-year economic expansion now on record”. Apparently, according to Carmen Reinickier’s piece in Insider, any reading over +30% has predicted and preceded all recent recessions in this country. Remember too that long expansions make both economists and investors “nervous.”
Recession watchers have been on high alert since the yield curve inverted between short-term and long-term rates in March and April of this year. (Typically, long-term 10-year rates are more profitable than short-term 3-month rates. The current inversion in the yield curve has made short-term rates more profitable.)
The New York Fed’s probability tracker uses Treasury spreads or the difference between 10-year and 3-month Treasury rates as described above. A negative spread such as the current spread or yield curve inversion has preceded all post-war downturns.
The New York Fed’s probability monitor is just one indicator among many in a complex, intertwined forecasting system. Remember to factor in “the latest great jobs report and impressive lead time,” wrote Reinickie.
Another indicator in this complex forecasting system includes “…global recession risks on the rise and (the possibility that) we could see a ‘really sharp correction” within the next 18 months,” said Ian Harnett, chief investment strategist with Absolute Strategy Research when speaking to CNBC’s “Squawk Box Europe” last week. Harnett suggested that price to earnings ratios (an important metric often used to gauge the value of stocks) point to “a substantial downturn.”
Additionally, the US ongoing trade war with China is unlikely to be resolved in the near future. And China’s economy, a longtime forerunner for global economic growth, is slowing to a near 30-year low of 6.2% this year. Some experts such as Bill Blair, the chief strategist with Shard Capital, suggest that the Chinese economy could slow to 4%.
One more mention that the Federal Reserve’s Chair Jerome Powell has recently signaled that “easier” monetary policy could be coming because, according to Powell, “crosscurrents have re-emerged.”