Recession Review: April 2019

So, the big economic release for 2019Q1 GDP arrived on Friday and the news was good! An initial estimate of 3.2% is a really solid beat on general consensus, even if one could argue that expectations were low.

In terms of the EMRI, given other economic and market conditions for the quarter, GDP would have had to come in at -3.5% to indicate a recession. A measurement like that would be the 15th worst reading since quarterly GDP started reporting in 1947 so fairly unlikely and bad even as far as recessions go.

Overall, the EMRI moved up +0.08, from a reading of +0.13 in 2018Q4 to +0.21 in 2019Q1 and well below the recession marker of +0.39, as seen in the chart below.

The Endless Metrics Recession Indicator - April 2019

2019Q2 Outlook and What to Watch

With the first month of 2019Q2 already in the books, fundamentals are looking strong and showing some positive momentum after the overall GDP beat from Q1.

Considering the framework of the EMRI, one would need to look for a significantly negative GDP. Similar to last quarter, a shock of -3.0% or worse. This looks unlikely given data thus far.

To watch GDP estimates on a weekly basis, the New York Fed Staff Nowcast provides a great model that incorporates numerous economic factors. As of Friday, it reads +2.08% following an increasing trend.

So, as of now, a recession beginning in 2019Q2 seems very unlikely and near impossible under the constraints of the EMRI.

2019Q3 and Beyond

While the EMRI is currently designed as a coincidental indicator, it does contain several leading indicators that can provide some guidance.

In particular, the yield curve continues to flatten, which puts pressure on banks as shorter-term interest expense constrains margins and compromises lending. Given the scrutiny on a yield curve inversion, one might even expect some outsized panic that could accelerate the speed of a recession's arrival.

Further projections also increase uncertainty. Meaning, smaller decreases in GDP estimates or market turbulence could indicate trouble. For the coming months, look for any sustained market drops or decreasing trends in economic data (for example in the summary NYFRB Nowcasting report). Anything below -1.0% on GDP would be a strong recession sign. So, basically, the same things one might always expect.

To venture a guess for 2019Q3 given data and trends right now - no recession. And, at the end of May, we will get to see if the data continues to support those claims!


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