Market news | 24 May, 2019

The probability of recession in the US increases significantly

Diego Balsa Portfolio Manager

Invest in the current socio-economic environment

Structural changes in the socioeconomic environment cause changes in the levels of central bank rates

Based on the Federal Reserve Bank of New York index, the probability that the United States will fall into recession in the next twelve months has increased significantly; it is currently very close to 30%, which is a historically significant level.

As can be seen in the graph, the last three times that this indicator was close to these levels, the economy suffered a significant economic downturn, such as in the 2008 economic crisis, the tech bubble in 2000 and the crisis of the early 90s.

It is therefore important to point out that all crises of the recent decades (although different in cause, characteristics, and intensity) were preceded by this New York Fed indicator, especially when it was above 30% probability. This threshold has not yet been exceeded, but it is very close (the latest data shows it to be 27.5%).

recesión EE.UU.

New York Fed 12-month recession probability index

This index, which is presented monthly, assigns a recession probability to 12 months from the moment it is published; is based on the difference in returns provided by the government debt issuances for 2 years, compared to 10 years. This indicator is used often to forecast economic cycles, given it has historically been highly reliable.

The reason why it is such a good predictor of turbulent economic periods is that if the spread of returns lowers between short and long issuances (which is called the slope of the curve), the financial institutions will be less likely to lend money as the brokerage margin is reduced (banks request money short term to lend in the long term).

This risk increase causes the main global economy to increase rates to slow down dramatically. When paired with other factors, such as business tensions, global macroeconomic weakness, etc., it could explain the change in the discourse of US monetary authorities, who have lowered their expectations for official rate rises and are sending a much more restrictive message.

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