Is Recession Coming? Framework Says Yes

Economics Group of Wells Fargo Bank, N.A. Summary Last year, we released a three-report series that outlined a couple methods to predict recessions and monetary policy pivots. Today, all three major tools still signal a recession within the next year. Despite the odds of a soft landing rising amid resilient economic data, the framework aligns with our base case expectation for a mild recession in early 2024. Three’s a Trend Last year, we released a three-report series entitled Is Recession Coming? that outlined a couple methods to predict recessions and monetary policy pivots. The economic landscape has shifted since we published that series—the fundamental components of the economy have performed better than anticipated in recent months despite the aggressive pace of policy tightening from the Federal Reserve. Economists are growing broadly divided on the prospects of a near-term recession, so we take this opportunity to update and revisit the series’ major tools. The first tool is our preferred Probit method, which is based on the Leading Economic Index, the S&P 500 and the employment component of the ISM manufacturing index. The method estimates that the probability of a recession fell to 52% in Q2, down from 55% in Q1 (Figure 1). While the probability has slipped, it has been above 50% in four of the past five quarters. Historically, when this Probit’s probability has surpassed 50%, the economy experienced a recession within the next four quarters. In short, our Probit framework suggests that recession within the next year is still more likely than not. READ FULL ARTICLE >>