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:
- interest coverage
- leverage
- loan performance
- 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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