US Recession Risk 2017–2018
Very Low. This does not mean it will not happen, of course. I don’t have a magical crystal ball and nobody does, but based on the structure of recessions and crises and based on a realistic assessment of the current context, the probability of a US recession is currently very low for the 12–24 month period going forward. This is also the case for most other industrialized economies.
Recessions have always hit when 1) inflation convincingly increased and 2) past central bank tightening. These seem to be the 2 “necessary conditions” for recessions to happen. NOT sufficient. There are times when there was monetary tightening and no recession ensued 12-to-24 months after (e.g. 1984–1985; 1994–1995), but it generally takes inflation-induced monetary tightening to trigger recession dynamics after the tightening, typically 12–24 months after.
There is no significant monetary tightening to come in all industrialized economies, simply because inflation is low and generally not very menacing. This is not to say that monetary tightening will not start soon in some countries, but nothing enough to cause recessions any time soon.
For the USA, inflation remains on the low side and is not prompting the rather neutral-to-dovish Yellen Fed to tighten in any significant way.
Fed Funds rate and core PCE YoY inflation rate:
Credit is a good proxy for future inflation trends, because credit creation IS money creation, which then creates inflation and increasing interest rates. On that side also, there is no significant pressure for the USA, as can be seen by the flattening slope of loans to private sector for the past several months:
Of course we can’t rule out unpredictable events such as terrorist attacks, geopolitical stresses, etc. But 1) these risks seem contained for the 12–24 month period and 2) it is useless to try to “forecast” random and mostly unpredictable events, so I base my analyses and forecasts on what CAN be at least somewhat looked into with hard data and sound financial and economic analysis.
If anything, I see flat inflation that will keep a lid on Fed tightening and on the USD. Stocks are hence unlikely to dive significantly, unless Trump political drama causes a panic. Other countries have more credit growth, but are starting from a very low base after years of deleveraging (Eurozone), so there is room remaining before we exhaust the macro options. Bull times ahead. Please click like if you appreciate the to-the-point insights.
Pascal Bedard
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