Thomson Reuters
- The probability of a major contraction in the economy shot up to 73%, from just 24% in December, says UBS.
- "Weakness in the data is now fully consistent with a very real risk of a recession, whether one happens or not," the bank economists said.
- Trade war tariffs a major factor, as is 'sharp deterioration' in consumer durables spending.
The chances of a US recession just spiked in the last month by a magnitude that UBS economists says shocked even them.
The probability of a major contraction in the economy shot up to 73%, from just 24% in December, says UBS. That's the largest one-month jump in recession risk since 1989, the economists led by Pierre Lafourcade said in a March 7 report.
"Our view that US/China tariffs would do more damage than expected has been playing out in recent months," economists said in the note. "The takeaway is that the weakness in the data is now fully consistent with a very real risk of a recession, whether one happens or not."
There have only been five intra-cycle slowdowns in the past 50 years, they said, and markets tend to respond strongly when they happen.
UBS
"This framework highlights such slowing even when a full-blown recession doesn't follow, so we have a good indicator for slowdowns, even if a recession is averted," UBS says.
Previous slowdowns have had a major impact on assets such as the oil price drop in 2015, which flummoxed investment the US energy industry.
UBS cites the trade war as a key contributor to the current rise in probability, with major job losses in the US coming from manufacturing states which have been hit hard by Trump's policies.
Spending drop drives rise in recession odds
Yet much of the research centers around a sector of the economy known as durable goods - a composite of retail items including such as appliances, jewellery, pets and toys, outdoor and sporting equipment that tend to be more discretionary and are a good indicator of both consumer spending patterns and household financial health.
UBS
While the decline in car sales in the West is a better-known economic danger signal lately, the UBS economists write that spending on furnishings, durable household equipment, and "recreational goods (boats for the wealthy)" are down the most since 2009, while spending on services has plunged by the most since 2012.
The "sharp deterioration in consumer durables spending drives increased recession probability," UBS said. "This turn in durables is consistent with the tariff story, but it also meshes with the harder-to-explain slowdown in
housing."
Tariff induced weakness alongside a more meaningful slump in global growth, as evidenced by recently reduced OECD growth expectations, could also be detrimental to the US economy going forward.