US ‘Flirting’ with Recession in 2017

US ‘Flirting’ with Recession in 2017

US ‘Flirting’ with Recession in 2017

$UBS

A team of economic strategists have warned that the US is flirting on the brink of a Recession. UBS Global Macro estimates a nearly 31% chance of a Recession in Y 2017.

The UBS’ credit model, designed to find the likelihood of a recession over the next few Quarters, considers 4 corporate credit measures, they are, as follows:

  1. interest coverage
  2. leverage
  3. loan performance
  4. bank lending standards in Recessions

Based on the historical relationship between the above 4  measures, the bank’s model estimates the risk of a recession at 31% over the next year, from Q-2 of Y 2016 to Q-2 of Y 2017.

The US recession risks is still elevated when compared to much of the post-crisis period.

Elevating this recession risk, according to the UBS report, are debt growth, up 5.5% Y-Y, struggling domestic profits, which fell 5.4% Q-Q in Q-2, and tighter lending standards.

Meanwhile, last Friday Boston Fed President Eric Rosengren wanted to raise interest rates last week to avoid a recession later.

Mr. Rosengren said he had argued for “a modest, gradual tightening: out of a concern that not doing so would put the recovery’s duration and sustainability at greater risk, by generating the sorts of significant imbalances that historically have led to a recession.”

“By 2019, I expect the unemployment rate to have declined below 4.5 percent. While I have a long track record of advocating for policy that supports robust labor market conditions, that is below the rate that I believe is sustainable in the long run,” Rosengren said in a statement.

Mr. Rosengren dissented at last week’s FOMC rate-setting meeting that left interest rates unchanged at a range of 0.25 to 0.50%.

Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester also dissented, saying they favored raising rates last week.

It was the 1st time since December 2014 that 3 Fed officials have dissented although Ms. George has run against the grain at four of the past 5 Fed policy meetings.

In his statement, Mr. Rosengren said such a low unemployment rate risked overheating the economy, putting upward pressure on inflation and increasing financial-market imbalances, which could ultimately lead to Recession.

The US economy last entered a recession, defined as 2 consecutive Quarters of Y-Y economic contraction, in December 2007, after the housing bubble burst, leading to a global financial crisis. That recession, dubbed the Great Recession, ended in mid-2009, making it the longest US recession since the end of World War II.

 

The fuel for the rising stock market; stock buybacks, is declining.

June was the least amount of stock buybacks in many a month. For 1-H of this year, we have seen a 33% decline in announced buybacks.

We are also seeing a significant decline in growth in the US economy’s incomes. Everybody talks about spending and GDP, but it is really incomes that count.

Individuals are showing a 2% gain in income and that is not enough to drive the economy North.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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