Risk of a Double-Dip Recession?
Is the US economy at risk of a double-dip recession?
The threat is rising, according to the latest update of the ADS Index, a real-time tracker of business conditions published by the Philadelphia Fed. This benchmark is a valuable metric for monitoring recession risk, but its attempt to be timely also leaves it vulnerable to noisy volatility. Nonetheless, the latest ADS slide in the current climate bears watching as the pandemic continues to roil America in the new year.
Last week’s weak payrolls data and the ongoing surge in weekly jobless claims took a hefty bite out of the ADS Index, which is updated whenever new data is published for any of its six components. Last week’s labor market numbers were brutal overall and ADS fell to just slightly above a level that marks recession conditions – the weakest reading for ADS since the economy began recovering in the summer from the initial coronavirus shock in the spring.
ADS tumbled sharply after last week’s economic updates, dropping to -0.73, which reflects data through Jan. 2. The index is currently just above the -0.80 mark that a San Francisco Fed paper identified as a level signaling recession conditions (red line in chart below).
Weighing on the latest downdraft in the ADS data is last week’s news that US payrolls declined in December for the first time in eight months. Meanwhile, new weekly filings for unemployment benefits continue to rise at an alarming rate. Claims increased 787,000 for the week through Jan. 2, which reflects a months-long run of advances that exceed the peaks in previous recessions.
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The double-barreled release of dark labor market data cut the ADS index sharply. Is this a sign that a new phase of economic contraction is now baked in for the first quarter and perhaps beyond? Maybe not.
The case for optimism (or at least a lesser degree of pessimism) starts by recognizing that the ADS Index is a volatile beast and so it’s prone to false signals. Note, too, that when we run the raw ADS data through a probit model to estimate the implied level of recession risk the results still show a moderate threat, as indicated in the next chart below.
Meanwhile, the monthly updates of the Chicago Fed National Activity Index (particularly the three-month average) is a more reliable data set and for now this profile still shows a solid pace of growth. The challenge, however, is that the Chicago Fed data arrives with a longer lag. For example, the current Chicago Fed update is through November – ancient history in the current climate.
The tradeoff and stakes between timeliness and reliability for recession-risk monitoring is unusually stark at the moment — pick your poison. Despite the weak ADS readings, it’s still premature to assume that the economy is inevitably hurtling into a new run of recession. But that view could change in the immediate future, depending on how the incoming numbers stack up over the next several weeks.
As usual, key numbers driving expectations and real-world results is closely linked to the coronavirus. Unfortunately, the pandemic’s path of death and destruction is getting worse. This may be the last battle before relief arrives in the months ahead as vaccines are delivered more widely. But for now, the numbers are increasingly worrisome. In particular, the trend in the daily change in new US Covid-19 fatalities continues to surge, rising to a new record high yesterday (Jan. 12), based on data from Johns Hopkins University.
Key economic updates to watch in the days ahead: weekly jobless claims (released every Thursday), along with this Friday’s December data on retail sales (Jan. 15). Economists expect that consumer spending fell 0.1% last month, according to Econoday.com’s consensus forecast. If correct, the decline will mark the third straight monthly slide.
For now, the current ADS warning is a reminder that the US economy’s expansion is struggling. The rollout of a vaccine will bring relief, but significant improvement on this front is still months away due to a slow and sometimes erratic distribution program.
Meantime, the US economy is increasingly vulnerable. Another batch of weak numbers for key indicators in the weeks ahead could formally trigger a new recession. Even if the business cycle turns negative, again, it may be a short affair. Nonetheless, the risk is greater compared with previous recessions as long as the uncertainty of Covid-19 stalks the land and unprecedented numbers of workers continue to lose their jobs week after week.