THINK Ahead: How to (not) spot a recession

What’s the probability of a recession? It’s a question we’re getting asked a lot, which is ironic really, given that we economists are famously… not very good at predicting recessions. That thing about “predicting nine out of the last five” is probably being generous.

So it might surprise you that I’m not about to predict the tenth. Recession isn’t our team’s base case on either side of the Atlantic, though I think we’d concede it’s not a high-conviction call.

Much, unsurprisingly, depends on whether China tariffs are rolled back over the coming weeks, and more importantly, by how much. Reducing those rates to 50-60% from the current eyewatering 145%, as has been touted in the press, might not actually change the picture a great deal. The majority of Chinese imports would still look uneconomical, and American firms would still be highly incentivised to find substitutes from elsewhere, with all the supply chain complexity that brings with it.

Suffice to say, whatever happens, the impact is still going to be sizable. Expect to see evidence of that in next week's packed data calendar. But watch out! That also means plenty of opportunities to spot a recession where the isn’t one.

Take manufacturing. Next week’s ISM survey will serve as a reminder of the perilous situation the sector now finds itself in. It's not looked great since the immediate aftermath of Covid. And back then, when the manufacturing surveys started to fall, talk of a recession began to rise rapidly. Yet the economy powered on regardless. It was a reminder that manufacturing simply isn’t the dominant economic force in the US that it once was.

That pandemic comparison may seem particularly pertinent now, given all the talk of empty shelves and supply bottlenecks today. But it's not a perfect analogy. Crucially, that was an economy that was propelled by pandemic-era stimulus, and the insatiable demand for services that came with it, both of which have long since gone away. With savings and confidence down and delinquencies up, the consumer is less well-positioned to absorb the costs of supply chain disruption this time around.

Would you like to know more about prominent global economic happenings? Read more on Opens in a new tabING THINK.