Chance of a U.S. Recession in the Next 12 Months?

After Monday's global market slump on the back of disappointing U.S. labor market data, many stock exchanges have recovered or almost recovered. However, the incident has renewed fears of a U.S. recession that has been pointed to by some indicators and that has been considered a possibility since the Fed's high-wire act of reining in inflation by rate hikes but not so much that the economy is stifled and turns to losses.

J.P.Morgan on Thursday raised its predicted odds of a U.S. recession before the end of the year to 35 percent from 25 percent. Going off of the yield spread, the relationship between the interest rates of short-term and long-term U.S. government bonds, a U.S. recession in the next 12 months was considered 56 percent likely as of July as seen in data published by the Federal Reserve Bank of New York. As more buyers become interested in long-term investments, the yields of these usually fall. If they decrease below the interest rates of short-term investments, the yield curve is considered inverted, i.e. abnormal, signalling a strong fear and likeliness of negative short-term developments in the economy. This has happened before all NBER-defined U.S. recessions since 1955, even though it is considered incidental before the most recent Covid downturn that came more unexpected as the result of external factors. The curve had one misfire in 1966, when no recession occurred. Additionally, the Sahm Rule indicator is also signalling bad news as of the latest employment report. It says that the U.S. economy is entering a recession if the unemployment rate’s three-month moving average exceeds the lowest three-month moving average of the past year by half a percentage point or more. The indicator stands 0.53 p.p. higher as of July.

The yield curve, the relationship between 10-year and 2-year government bonds, has now been inverted since July 2022, with the longest time between an inversion and the beginning of a recession having previously stood at just around 1.5 years. This has led some observers saying that the indicator is no longer reliable. Much more current to a potential upcoming recession is the aforementioned engineering of a so-called soft landing by the Fed. The U.S. central bank has kept its rates stable after inflation-related hikes, but has been mulling a cut that would have to come at the right time to balance out demands of economy stimulation and inflation fighting. Monday's stock market scare could now motivate it to go ahead with this plan and avert a recession in time, according to observers.