Spring is an optimistic time of year, with the smell of grass and fresh flowers, longer days and bright sunshine. And it is so predictable – it happens every year!
If only the economic cycle were as predictable! Recessions happen infrequently and the last one ended in June of 2009.
One of the classic tools for predicting recessions is the NY Fed’s “Probability of U.S. Recession Predicted by Treasury Spread – Twelve Months Ahead.” This model uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead. As you can imagine, the Fed has been tracking and analyzing this data for decades and it does a pretty good job.
As the data indicates, it is hard to see a recession in 2019 with the U.S. economy still so strong. But as the chart also shows, the risk of a recession can rise or fall suddenly for any number of reasons. What we take way from this data is treasury spreads indicate the economic cycle is at least in late fall: leaves are turning red and gold and there is chill in the evening air.
We will get an update from the Fed this week when the Federal Open Market Committee meets to set monetary policy. The post-meeting statement and press conference will provide insights into the FOMC’s thinking on both the economy and interest rates. We don’t expect any changes to the Fed Funds Rate, but like so many previous meetings, all eyes will be on the dot plot, which highlights committee members expectations for future rate moves.
Markets also do a good job of anticipating the changing of the season and will move ahead of an actual recession. We note investment grade credit spreads appear to have reached their cyclical tights in February 2018, and the last S&P 500 top was in September 2018.
In the coming weeks we will start getting outside more often to enjoy the sunshine, and we will also ensure portfolios are getting ready for cooler weather.
Source: NY Federal Reserve