No signs of recession yet, but risks loom
Index gains fade: S&P 500, Nasdaq edge up, Dow slips into red
Energy leads S&P 500 sector gainers; Healthcare weakest group
Dollar, gold up slightly; crude up >2%; bitcoin off ~1%
U.S. 10-Year Treasury yield rises to ~3.96%
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NO SIGNS OF RECESSION YET, BUT RISKS LOOM
A bunch of U.S. indicators has been pointing to moderating economic growth such as payrolls, wages, and personal income. That doesn't mean though that recession is imminent, according to Veneta Dimitrova, senior U.S. economist, at Ned Davis Research (NDR) in a note.
"While a contraction will be inevitable at some point, as implied by the word 'cycle' in business cycles, this is not yet the time," she says.
NDR has 10 key economic indicators in its U.S. Recession Watch Report that historically have turned around the start of recessions. The risk that the economy is in contraction or on the cusp of one rises when majority of these indicators exceed their recession thresholds.
At this time, only the ISM Manufacturing PMI is flashing red, notes Dimitrova.
Looking ahead, the NDR economist points out that high-frequency and leading indicators continue to suggest the U.S. economy will continue to expand in the near term, but at a slower pace.
"We reiterate our projection of 1.5%-2.0% real GDP growth this year," Dimitrova says, which is below potential growth as implied by trends on productivity and labor force growth.
NDR, however, is currently watching out for the risks to growth.
She notes that the recent selloff in equities and widening of credit spreads have led to tighter financial conditions, which is a risk to growth. In the meantime, the negative effect of the latest equities' carnage on consumer wealth invested in stocks is a potential weight on consumer spending.
Dimitrova says the stock market tends to lead the economy, but "corrections and cyclical bear markets" are more frequent than recessions.
NDR also points to geopolitical tension as a drag on growth.
The firm's geopolitical risk index is a news-based measure of adverse events, with its biggest jumps since 1985 seen around the Gulf War, 9/11, and the Russia-Ukraine war.
Dimitrova cites Fed research showing that higher geopolitical risk "foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks."
(Gertrude Chavez-Dreyfuss)
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