US Business Cycle Risk Report – 18 May, 2016

US economic growth remains sluggish, hinting at the possibility that a new recession may be near. But the numbers don’t align with a pessimistic intuition. The probability is extremely low that April marked the start of an NBER-defined downturn, based on published reports to date. Projecting a broad set of indicators into the near-term future suggests that the US will continue to sidestep a macro slump. Yes, the outlook could deteriorate if the incoming numbers stumble. But for the moment, recession risk remains low.

In fact, the prospects look encouraging for a modest rebound in economic activity in the second quarter, based on the Atlanta Fed’s latest nowcast. Although yesterday’s GDPNow estimate ticked down to a projected 2.5% increase for Q2 (as of May 17), that’s still a solid bounce higher from Q1’s tepid 0.5% advance. Forecasts aren’t written in stone, but the current forecast offers support for expecting some degree of improvement in output after a disappointing Q1.

The main caveat: a string of surprisingly weak reports in the days and weeks ahead could alter the current calculus. The recent run of weak numbers for several indicators leaves the trend in precarious state. If the incoming figures stumble, the outlook could suffer. Forward momentum at the moment isn’t strong enough to survive another wave of disappointment in the economic reports. The near-term projections suggest that’s not likely to happen, but no one really knows what the future will bring and so the current optimism that the US will sidestep recession is a shallow affair.

Nonetheless, the current profile based on the numbers in hand show that the US macro trend remains positive, albeit at diminished pace relative to recent history. The analysis is based on a methodology outlined in Nowcasting The Business Cycle: A Practical Guide For Spotting Business Cycle Peaks. The Economic Trend and Momentum indices (ETI and EMI, respectively) have fallen in recent months but remain at levels that still equate with expansion. Here’s a summary of recent activity for the components of ETI and EMI: