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Monitoring US recession risk 1/8/2019

Market behaviour and comments from company executives point towards increasing concern about the risks of a recession in the US. Based on the historical experience, the pace of monthly job creations is a key indicator to assess this risk.

TRANSCRIPT // Monitoring US recession risk : January 2019

CHART OF THE MONTH

 

François Doux: In Chart of the Month, we’re going to talk about the risk of recession in one country in particular: the USA.

William De Vijlder, hello.

 

William De Vijlder: Hello.

 

François Doux: How do we traditionally measure the risk of the USA falling into recession?

 

William De Vijlder: The preferred indicator for economists is the unemployment rate, and specifically its year-on-year change. When that change becomes positive, there has typically been a recession in the past.

 

François Doux: The problem is that the unemployment rate signals a recession, whereas your job is to forecast it.

 

William De Vijlder: Yes, our job is to anticipate developments, so we look at other indicators, hoping to find a signal that shows an increasing probability of recession.

 

François Doux: What are these indicators?

 

William De Vijlder: I’ve chosen two very popular ones.

The first, shown by the red line, is an indicator of sentiment in the US manufacturing sector. We have taken all recessions since 1960 and, for each month of the 24 months preceding the start of the recession, we calculated the average reading for this manufacturing sector indicator. That gives us this average, the red line. We can see a sort of plateau effect. The indicator remains fairly high until around 10 months before the economy enters recession. After that, it falls very quickly.

 

François Doux: And when it falls below 50, the economy is contracting and we are in a recession. Ten months before, there are some words and a blue line. What does that line represent?

 

William De Vijlder: The blue line shows job creations, and we perform the same exercise. For each month, we calculate the average number of jobs created 24 months before the start of a recession, 23 months before etc. We see a very clear trend, which makes it easier to understand. What’s fascinating is that between 24 and 14 months before a recession starts, the figures are fairly high, whereas here they are gradually falling. The important point to note is that, even one or two months before the economy falls into recession, job creations are still running at between 100,000 and 150,000.

 

François Doux: 100,000 to 150,000 jobs being created every month, and the economy can fall into recession just after that.

 

William De Vijlder: Yes, that’s right.

 

François Doux: Last question: what’s the situation today? We have non-farm payroll numbers for November 2018 at 155,000 and an ISM manufacturing index of 59.3. So we’re at the upper end of the range, but your conclusion is that we should remain cautious?

 

William De Vijlder: Absolutely, because optimists will look at one indicator while the others will focus more on job creation numbers. What’s clear to me is that job creations, which is my preferred indicator, will allow us to monitor closely the behaviour of the US economy in 2019.

 

François Doux: We’ll follow it throughout 2019.

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