Research conclusion
Overseas economy: when we start talking about recession
From covid-19 pandemic to epic financial rescue, overseas economies have experienced a strong rebound in recent two years. If the time goes back one quarter, few people will put the economic recession on the list of macroeconomic topics in 2022.
However, since the beginning of 2022, unexpected shocks have successively impacted the macro expectations of the market: unexpected inflation, ultra hawkish central bank, and additional volatility and uncertainty caused by the background of the conflict between Russia and Ukraine. At present, the market is indeed widely talking about and looking forward to recession, and may even start pricing recession in the future.
Is the risk of recession real? How close is it? From inflation to stagflation, how will asset prices react accordingly? In the next series of reports, we will analyze and discuss the above problems from different links and angles one by one. In this report, we will start from some important leading economic indicators and focus on the verification of current recession signals.
Looking forward to recession from economic leading indicators
According to the definition of NBER, the last economic recession in the United States that lasted more than a year dates back to December 2007 to June 2009. Before entering 2022, the overseas economy has generally maintained the strength since the recovery. If it is obviously impossible to effectively assess and discuss the risk of recession based on the current economic situation - at present, we should focus on the performance of leading indicators relative to the overall economic cycle.
The decline of Lei for three consecutive months can be used as an important signal of recession warning. Over the past 60 years, Lei has experienced a total of 11 downturns in three consecutive months, of which 8 recession cycles have followed. From the confirmation of the signal to the entry of the economy into recession, it can take as short as 3-6 months and as long as 1-1 / 2 years.
At present, the comprehensive leading indicators show signs of peaking for the first time after this round of recovery cycle, but the standard for predicting recession is not established. Overall, the current readings of most leading economic indicators are better than the historical average. However, we need to note that some of these indicators are showing signs of decline, such as orders and construction permits; Others are affected by the structural impact of the epidemic and can no longer evaluate their current information according to the pre epidemic standards, such as the employment market indicators under the contradiction between labor supply and demand.
Early warning of high inflation, tight currency and corresponding leading indicators
Will consumption expectations collapse in sustained high inflation? Consumer demand is the cornerstone of the American economy, and the decline of consumption leads to the decline of the economy. High inflation is an important risk factor facing consumption expectations. High inflation suppresses consumer expectations, so from the data, inflation is usually opposite to consumer confidence. When inflation is abnormally high, high inflation is easy to become the decisive risk point to destroy consumer expectations: the two rounds of inflation soared in 1970s, accompanied by a sharp decline in consumer confidence index in the same period. From the current situation of the indicators, the latest reading of the consumer confidence index of the University of Michigan is 59, which is the low level in recent 10 years, and the consumption expectation index of the Advisory chamber of Commerce has shifted to a range lower than the historical average since 2021q3, all suggesting the possible downside risk of consumer demand in the future under the environment of high inflation.
Is the fed an inducement to recession again? Term spread is a leading indicator related to monetary policy conditions. Term spread is essentially a comparison between the conditions of spot monetary policy and the intensity of medium and long-term economic activities. Before most recession cycles, the Federal Reserve has adopted radical tightening policies. Looking forward to the long term, as long as the interest rate increase path moves forward according to the forward-looking guidance, the upward trend of short-term interest rate is deterministic. However, although the long-term interest rate has surged sharply in the near future, we believe that the trend and expectation of forward interest rate spread convergence and inversion still exist: the end of this round of interest rate increase cycle may be the deep inversion of the curve, The depth of upside down will be enough to offset doubts about the effectiveness of today's upside down signal (the suppression of long-term interest rates by large-scale asset purchases by the central bank).
Risk tips
The calculation results of the model depend on the input conditions and scenario assumptions. The development trend of various economic indicators is uncertain.
