TORONTO: The U.S. and Canadian economies will see growth slow over the next six months but are unlikely to experience a double-dip recession, according to CIBC’s Recession Probability Index (RPI).
The CIBC RPI measures the probability of a recession by examining trends in a number of indicators, including credit spreads, interest rates and the Philadelphia Federal Reserve Board’s ADS Index (which includes weekly U.S. unemployment benefit claims).
“We’re not in material danger of a rude double dip in the next two quarters,” says Avery Shenfeld, chief economist at CIBC. “The probability estimate is likely more consistent with a slowdown rather than a true double-dip recession. But, given the uncertainties, fiscal tightening ahead and the potential for a slow economy to be vulnerable to shocks, we will keep an eye on our new indicator nevertheless.”
He cites a number of factors that should keep the American economy from hitting a double-dip. First, he expects that the U.S. government will back away from shutting off the stimulus taps in the face of lagging job growth. But even a modest tightening by the U.S. Federal Reserve Board in the second half of next year now looks premature. Best bets are no exit from low rates until 2012.
“Certainly, there are reasons for concern,” adds Mr. Shenfeld. “The U.S. economy has been propped up by fiscal stimulus that is now winding down. Job growth has lacked its typical post-recession vigour, leaving a household sector swamped with bad mortgages having few reasons to accelerate spending. But there is still a base of ongoing support coming from healthy corporate profits and a wide-open tap on monetary stimulus. That has us projecting a sharp deceleration in U.S. growth, but not an outright recession, with a similar fate in store for Canada.”
Shenfeld says several other factors support his view that a double-dip is not likely. There is currently strong market liquidity, as opposed to the plummeting liquidity ahead of the recent downturn. Lack of market liquidity is often a telling sign of economic trouble ahead.
Also, the US Treasuries curve is much steeper today than it typically is when a recession is coming up in the next few quarters. Although, with short rates near zero, curve inversions can’t occur.
Ahead of a recession, corporate spreads tend to widen sharply as investors anticipate credit defaults. Spreads remain quite tight by the standards leading up to recent recessions, and don’t show the sharp upward trend typically seen ahead of a downturn. It’s clear that investors are far from pricing in a recession.