U.S. Market Data Is Showing Risks of a Downturn


(Bloomberg)—As the bond market’s yield curve flashes warning signs of a U.S. recession, some key economic indicators are offering more conflicting signals about the outlook.

Recent government and private data show weakness from housing to retail sales and consumer sentiment, prompting a more dovish tone from the Federal Reserve and pushing rates traders to price in a good chance of an interest-rate cut this year. The more downbeat signs also have economists cutting estimates of fourth-quarter gross domestic product and projecting a weaker start to this year.

At the same time, as data wrinkles are ironed out after a partial government shutdown delayed reports, a healthy American labor market with rising wages is propelling the economy toward the longest expansion on record.

Market Signs

Compared with the mixed signals in the data, the market looks more conclusive. A closely watched segment of the U.S. yield curve, the gap between three-month and 10-year rates, inverted last week for the first time since 2007. In the lead-up to the economic downturn that began in December 2007, this part of the curve initially dipped below zero just under two years before the recession started.

Strategists at Citigroup Inc. prefer to track the spread between the three-month Treasury bill rate and five-year five-year forward rates — which has narrowed to about 26 basis points. That has lifted the probability of a recession occurring in the next year to a range of 37 percent to 45 percent, Citigroup strategist Ruslan Bikbov wrote in a March 22 note.

Money-market traders see the economy turning so sour that the Fed will actually cut rates this year. Fed funds futures are now pricing in about 30 basis points of easing by the end of 2019, suggesting a cut of at least one quarter-point from the U.S. central bank.

State of Business

Chief executives at the country’s largest companies were less optimistic for a fourth straight quarter, highlighting the broader trend among corporations. After the initial boost to earnings and some investment that tax cuts provided last year, the effects are expected to weaken in 2019. In addition, the trade war with China and tariffs have increased the price of goods and curbed demand for U.S. exports — with no end in sight.

Peak Factory?

Manufacturers are bearing the brunt of the global slowdown, with three regional Fed surveys showing weakness in new orders this month. A strong dollar is also holding back demand for American goods. With labor costs rising, factories in February added the fewest jobs since 2017. A national gauge of factory expansion recently hit a two-year low.

Still, orders for business equipment rose by the most in six months at the start of the year, boding well for production in the near term.

Consumer Slump

Consumers drive most of the American economy, so their state of mind matters. Lately, some confidence measures are tapering off: The Conference Board’s index dipped for the fourth time in five months and missed all analyst estimates in March, led by dimmer views of present economic conditions.

But there’s how consumers feel and there’s what they actually do. Retail sales that had stumbled in December bounced back in January, but the most recent report also showed that the prior month’s drop was bigger than initially reported. It’s an indication that consumers are on more even footing in the first quarter, but could be more concerned about the economy than the data are showing so far.

“We expect solid consumption growth to outweigh a slowdown in business fixed investment and export growth, but persistent sharp declines in confidence and labor market perceptions would clearly reduce the likelihood of this outcome,” economists at Berenberg Capital Markets said Tuesday in a note to clients.

Housing Woes

One reflection of consumers’ changing appetites is showing up in residential real estate. While existing home sales, which comprise 90 percent of the market, rebounded by the most since 2015 in February and homebuilder sentiment has been on the upswing, virtually all other data are cooling. New-home sales declined in January, starts in February faded by the most since June, and a gauge of prices in 20 major U.S. cities advanced by the least in six years.

New York Fed President John Williams said earlier this month that he’s seen a sustained construction slowdown, in part reflecting constrained financial conditions. At the same time, economists including Blerina Uruci at Barclays Plc say that rising wages, a dip in mortgage rates and some recent easing of home prices should help counter any affordability concerns that might be weighing on the market.

Labor Light

The job market, currently a pillar of strength with sustained wage growth and a rising prime-age participation rate, may provide a counterweight to any signs of a recession. The market has shown some cracks recently as companies struggle to find employees and some put off investment amid economic uncertainty. But payroll gains have averaged about 215,000 per month in the past five years as employers draw in workers from the sidelines.

That strength is keeping economists and investors alike careful when talking about any recession risk.

“There may at some point be a recession, but it doesn’t seem like it is imminent,” said Thomas Wacker, head of credit in the chief investment office of UBS Global Wealth Management.

To contact the reporters on this story: Katia Dmitrieva in Washington at [email protected]; Liz Capo McCormick in New York at [email protected] To contact the editors responsible for this story: Scott Lanman at [email protected] ;Benjamin Purvis at [email protected] Brendan Murray


© 2019 Bloomberg L.P

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