eco TV
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



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.

View more videos Eco TV

On the Same Theme

The Powell put 1/11/2019
Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth. Professional forecasters' estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.
The big growth scare 1/4/2019
The big correction of US equity markets since the end of September reflects increased investor concern about the growth outlook. The data for the 4th quarter nevertheless point towards ongoing sustained growth. Data released since the start of the year provide conflicting signals with a big decline in the ISM manufacturing index and a strong increase in non-farm payrolls. Uncertainty about US-Chinese trade remains a key factor weighing on business sentiment.
Data surprises send mixed signals 1/4/2019
The vast majority of the indicators remain above their long term average, with inflation and the core personal consumption expenditures deflator being notorious exceptions. Compared to consensus expectations the picture is mixed.
Will central bank reserves soon become insufficient? 12/21/2018
Over the past four years, the US Federal Reserve has reduced the surplus central bank reserves that it had built up under its quantitative easing programme. Over the same period, the Basel 3 banking regulations have, however, significantly increased banks’ demand for central bank liquidity. Before Basel 3, all reserves in excess of “required reserves”, in the monetary policy sense of the term, were, justifiably, treated as excess reserves. Since the new liquidity rules have come into force, only those reserves in excess of the regulatory constraint may be so treated. Although US banks have so far limited the initial effects of the reduction in reserves on their liquidity ratios, notably at the cost of increased dependence on the Federal Home Loan Banks, it would appear that the first signs of tension in liquidity are beginning to show.
United States: the increased role of Federal Home Loan Banks 12/21/2018
In the US, the preservation of liquidity ratios has hidden the greater use by banks of financing from Federal Home Loan Banks, which themselves are highly exposed to the risk of maturity transformation.
Heading towards slower growth in 2019 12/11/2018
US growth should slow in 2019 on the back of the waning impact of the fiscal boost, slower global growth, the strengthening of the dollar this year, the rise in interest rates. Slower but still above potential growth means that monetary policy will be prudent: we expect two hikes in the first half of the year, followed by a pause so as to gauge how the economy reacts to past tightening. This would lead to a monetary desynchronization because in the meantime eurozone inflation should have picked-up sufficiently so as to allow the ECB to hike its deposit rate in the second half of 2019. This desynchronization should cause the euro to strengthen versus the dollar. The key uncertainty to this outlook concerns the trade disputes between the US and Europe and in particular the US and China. Prolonged uncertainty on this matter would act as a headwind to growth.
Strong growth to slow down 11/30/2018
Most indicators remain above their long term average and several, of which the all-important non-farm payrolls, have surprised to the upside. Ongoing strong growth is reflected in the Atlanta Fed nowcast for the current quarter (an annualised 2.6% versus the previous quarter).
Federal Home Loan Banks help shore up bank liquidity ratios 11/7/2018
Since October 2017, the US Federal Reserve has gradually reduced the size of its balance sheet by limiting the amount of securities replaced at maturity. This automatically unwinds the banks’ reserves with the Fed. To preserve their short-term liquidity coverage ratio (LCR)1, some banks have increased their government bond holdings or reduced the use of unsecured wholesale funding. Recently, others have stepped up borrowing in the fed funds market (where institutions with Fed accounts trade their deposits and central bank reserves). This is largely due to the public guarantees on the Federal Home Loan Banks2 and their major lending capacity in this market. Considered as official sector deposits, fed funds borrowed from FHLB are relatively low cost (presumably high probability of being rolled over, and theoretically low cash outflows) and enable banks to rebuild their stock of liquid assets. 1 Banks are required to hold a sufficient amount of high-quality liquid assets, such as central bank reserves, to cover the net cash outflows triggered by a serious 30-day liquidity crisis. 2 A regional network of 11 home loan banks that provide financial support to the housing market via advances to member financial institutions.
Don’t mention the R word 10/31/2018
People update their expectations more quickly when media coverage of a given economic topic becomes more intense. The change in the outlook is more important than today’s cyclical environment. Monitoring media coverage of economic slowdown risk will become particularly relevant against the background of a loss of momentum in survey data
What explains the increase in equity market volatility? 10/26/2018
Equity markets continue to be particularly volatile. Understandably this has weighed on government bond yields. The volatility of high yield bonds remains low however. This could indicate that recent equity market swings are driven by other factors than worries about the outlook for GDP growth or monetary policy

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1994 articles and 547 videos