Is a recession on the way?

Financial and economic indicators answer the question

The majority of Canadian chief financial officers, 86%, say the economy will enter a recession by the end of 2019, finds a Duke University/CFO Global Business Outlook. For U.S. CFOs, that figure is nearly half.

In a TD report, chief economist Beata Caranci puts talk of a pending recession to rest—at least mostly—as she outlines why financial and economic indicators don’t support such rhetoric.

For example, while greater market volatility reared its head in 2018, volatility alone doesn’t reliably predict a recession, she says in the report. “If we took our cue from equity price movements, we would be on our third recession call since 2009,” she says, referring to 1% changes in the value of the S&P 500 that number at least 250 in a single day.

Rather, to predict a recession, volatility must coincide with parallel movements in other risk assets. Though yields and spreads have edged up, they maintain a healthy margin below other historical periods of stress, says Caranci, such as that which preceded the 2001 recession.

The most reliable indicator of recession—the U.S. yield curve—is also no cause for concern, as it has yet to invert, and, when it does, it sometimes offers a one- to two-year lead-time to the start of a recession, says Caranci, such as in 1990, 2001 and 2008.

Another factor to watch for recession clues is consumer confidence, with both business and consumer sentiment holding at elevated levels. “What’s most astounding is that the U.S. continued to post job numbers in excess of 200,000 for most of this year, fighting against the dynamics created by a tightening labour pool and worsening demographics,” says Caranci.

Similarly, a Desjardins report says U.S. confidence indexes and leading indicators are “completely at odds with the prospect of a sharp slowdown.” Desjardins expects markets will continue to respond in step with that sentiment, with longer-term yields resuming an upward trend.

Still, there’s no doubt that U.S. and global economic momentum is past its height, based on such things as capacity constraints and less accommodative monetary policy, says the TD report. Going forward, event risks will play a greater role, says Caranci, citing such things as Brexit and U.S.-China trade tensions, which weigh on consumer confidence.

“Event risks require political solutions, are not easily forecastable and, by extension, can lead to unintended consequences,” she says.

Read the full reports from TD and Desjardins.