US Business Cycle Risk Report – March 21

Recession risk remains low for the US, but there are hints that the sluggish pace of growth in last year’s fourth quarter may continue in Q1.

Last week’s revised first-quarter estimate of GDP growth slipped to a weak 0.9%, based on the Mar. 17 update of the Atlanta Fed’s GDPNow model – well below the sluggish 1.9% increase in 2016’s final quarter. But is that worrisome estimate excessive? Yes, according to alternative data sources, including The Wall Street Journal’s economic survey for this month, which anticipates GDP growth in Q1 will hold steady at 1.9%, based on the average estimate among economists. Meanwhile, the New York Fed’s current Q1 projection for growth is substantially higher at 2.8% (Mar. 17).

The near-term economic outlook may be in flux at the moment, but forward momentum still appears strong enough to keep recession risk to a minimum, based the macro profile through February. Data published to date continues to show that the probability of an NBER-defined recession is virtually nil. The Capital Spectator’s proprietary business-cycle indexes continue to signal low business-cycle risk through last month. For the nearly complete February profile, just two of 14 indicators in our model are weighing on the broad trend: oil (via sharply higher prices in year-over-year terms) and the ongoing contraction in the monetary base in real terms. Otherwise, the remaining numbers paint an upbeat profile. (For a more comprehensive read on business-cycle analysis on a weekly basis, see The US Business Cycle Risk Report.)

Yesterday’s February update of the Chicago Fed National Activity Index tells a similar story. The benchmark’s three-month average increased to +0.25 last month, the highest reading in more than two years and far above the -0.70 tipping point that marks the start of new recessions. Based on the bank’s index, it’s reasonable to wonder if Q1 GDP growth may turn out to be stronger than economists are expecting.