While not as dire as the recent analysis by Deutsche Bank which calculated that a recession over the next 12 months is more than likely, with odds rising to 60%, overnight JPM released its latest recession probability analysis, and – somewhat unexpectedly following the last two stellar job reports and a full court political press that the recovery has rarely been stronger going into the election – now sees a 37% chance of a recession in the next 12 months. This is the highest recession probability calculated by Jamie Dimon’s bank during the current economic cycle, and matches the odds first laid out in early July.
While the rising odds of a US recession are not surprising on their own, what is notable is that even JPM highlights the disconnect between the economy and the financial markets, observing that “as risk markets have rallied somewhat since our last update, the probability from the model based on macroeconomic data is now considerably above our models based on financial markets“, confirming once again how distorted the relationship between the markets, supported by central banks, and the underlying economy has become.
Here is how JPM’s Jesse Edgerton came with this number:
US recession risk tracker back up on weak business sentiment and profits
After dropping to 30% on July 8, our preferred macroeconomic indicator of the probability that a recession begins within 12 months has risen back to 37%, equaling its high for the expansion. (Table 1, bottom row and Figure 2, blue line).
As risk markets have rallied somewhat since our last update, the probability from the model based on macroeconomic data is now considerably above our models based on financial markets (Table 2).
Since our last update, consumer sentiment and auto sales have both improved, but most other near-term indicators have softened. The four-week average of initial claims for unemployment insurance edged up over the last month, the Senior Loan Officer Opinion Survey showed business credit conditions tightening more rapidly, and single-family building permits fell in July. But the most notable development in the near-term data has been the deterioration in the business sector sentiment surveys, particularly for nonmanufacturing. The nonmanufacturing surveys from Markit and the New York, Philly, and Richmond Feds all moved down in their August readings, and our composite sentiment index moved down noticeably (Figure 3).
The measure of recession risk based on all of the near-term indicators has moved up to 25%, its highest reading in the last several months (Table 1, third row from bottom and Figure 3, orange line).
This morning’s GDP report also included the first read on corporate profits in the second quarter. The report incorporates preliminary data from the Census Bureau’s Quarterly Financial Report, which includes private businesses, in addition to earnings reports from public companies. Profits fell significantly short of our forecast, and the margin measure that enters our recession model moved down, raising the model’s “background risk” of recession to 35%. But, as we noted in our last update, the profits and margins data can be subject to large revisions, raising the question of whether we should discount some of the swings in these data.
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