The topic of recession – primarily in the USA, as the most important economic region – is currently not overly prevalent in the media. The following chart shows Google searches for this term: public interest (red line) shows clear peaks in 2020 and 2022, after which it has remained subdued. By comparison, “inflation” is being searched for more frequently (blue line).
Google searches for “recession”
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook
The reason why a recession could still be imminent after all is the delayed effect of the massive global interest rate hikes since Q1 2022. These dampening measures have met with an unexpectedly resilient economy in the USA. However, whether this resilience lasts, remains to be seen. It has helped that companies and private individuals were able to lock in the zero interest rates to a certain extent until 2022.
Sahm indicator
A key assumption is that a recession is accompanied by a sudden rise in unemployment, with all the associated negative consequences. The Sahm indicator measures this using a moving average of unemployment. The threshold value has not currently been reached, but the past three monthly values have shown an increase:
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook
However, only a decline in corporate profits would trigger widespread redundancies, and there are currently no signs of this happening.
BCA indicator
The similar BCA indicator does not measure unemployment overall, but rather the number of people who could permanently leave the labour market due to no longer having sufficient skills. Here, too, the value is elevated:
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook
Historically, the US yield curve has been very informative, occasionally indicating via an inversion that the short-term interest rates are higher than interest rates in a long-term investment, which indicates economic uncertainty and a reluctance to make long-term plans.
Recession forecast from the US yield curve
The US Federal Reserve uses the interest rate structure as an input factor for the probability of a recession – the model is therefore purely mechanistic and not qualitative, but in the past it has certainly been meaningful. However, it should always be borne in mind that, thankfully, recessions have not happened very often and therefore elude statistical analysis to a certain degree. The chart shows the result, which reflects the inversion that has been in place since 2022:
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook; Please note: Forecasts are no reliable indicator of future performance.
Immigration as protection against recession
Interestingly, unemployment plays a dual role here: as an indicator in the event of a sudden increase, but also as an economy’s protective mechanism against distortions. The labour market in the USA has been exceptionally tight since the pandemic. Older workers in particular have left it, leading to a labour shortage. This has been offset by immigration, i.e. an influx of workers. The chart shows the rising proportion of workers who were not born in the USA:
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook
The influx of workers, for example from Mexico, has enabled the US economy since the pandemic to avoid an imbalance that would otherwise have occurred due to labour shortages.
“Don’t fight the US Consumer” as protection against recession
Finally, consumers in the USA are notoriously keen on spending, but are no longer as highly leveraged as they were before the 2008 financial crisis. Consumer spending flows directly into GDP and thus offers protection against its reduction or recession. The chart shows that spending is ambitious by historical standards:
Sources: Bloomberg; Erste Asset Management Multi Asset Chartbook
Conclusion
Although a US recession has receded from view, it is worth monitoring indicators to ensure that investment managers can react quickly and tactically should it materialise.