Wells Fargo analysts warn that the probability of a U.S. recession is more than 25 percent during the next six months, the highest since the Great Recession era.
“At present, we are not calling for a recession within the next six months. However, given that the recession probabilities based on our preferred model and average of all models are somewhat elevated, it is not wise to entirely dismiss recession risk,” Philly.com cites John Silvia, chief economist at Wells Fargo & Co., as saying after sifting employment data, stock market valuations and economic output reports.
“Recent market volatility and data from the factory sector raise the question: Is the U.S. economy headed for a recession? Based on our preferred model, the chance of recession is about 25 percent over the next six months,” the Wells Fargo report said.
Silivia uses the National Bureau of Economic Research Inc. definition: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
“Using the most recent data (through February 2016), our model suggests an elevated probability of a U.S. recession during the next six months (about 25 percent),” the report said.
“The reason for the elevated probability is that the trend for the predictors, such as the
S&P 500 and the LEI, has been weak the past few months. Clearly, the probability is well below the threshold of above 50 percent for a recession call, but it is the highest reading in the post-Great Recession era,” the Wells Fargo report said.
“The model utilizes the Leading Economic Index, the S&P 500 index and the Chicago-PMI employment index as predictors. Our model has served us well; it started predicting (in real-time) a significantly higher probability of recession back in 2007 (58 percent chance of a recession in Q3 2007),” Wells Fargo explained. “In addition, we never joined the “double-dip” camp back in 2010-2012, largely because our Probit model did not indicate a high-likelihood of recession during that time period,” the report said.
To be sure, central bankers have managed to steer the world economy clear of a recession while leaving it stuck in the same rut that led to its troubles in the first place.
A torrent of monetary stimulus in recent weeks helped spark a turnaround in financial markets by assuaging investors’ fears of an impending global downturn. Yet it did little to lift hopes among economists of a stronger pickup that would put growth on a more solid footing, Bloomberg reported.
“The global economy will continue to muddle along,” said Charles Collyns, chief economist for the Institute of International Finance in Washington and a former U.S. Treasury official. He sees growth this year of about 2.5 percent — the same as in 2015 and well short of the 3.7 percent average over the five years leading up to the global financial crisis.