Probability of Recession Decreases
Recent economic reports show the U.S. economy continues to expand, although only at a modest pace. Based on improving U.S. economic data and signs of stability in Europe, we are lowering our probability of recession to 20% from 35%.
—Gary Thayer, chief macro strategist, Wells Fargo Advisors
During the past year, we have maintained that the U.S. economy was likely to avoid recession, even though the European debt crisis threatened to send several European countries into recession. This week’s reports showing manufacturing is expanding in the United States, while the European economy contracted 0.3% in the fourth quarter of last year, are consistent with our view.
We believe the probability of recession is influenced by many factors. Some are measurable, and some are un-measurable. Based on our analysis of U.S. economic data alone, the probability of a recession in the United States has been declining during the past few months as the economic data improved. However, the risk of recession is also dependent on global factors, not just U.S. factors. We have maintained the probability of recession at 35% since last fall because we believed there was a continuing risk that European problems would potentially hurt the U.S. economy. Fortunately, that risk appears to be diminishing now. As a result, we are lowering our probability of recession to only 20%. Nevertheless, this 20% still includes a small premium for the possibility that the European debt crisis could take a turn for the worse. But the risk from Europe appears to be decreasing as policymakers pump extra liquidity into the European financial system.
This week’s chart shows the New York Federal Reserve’s empire state manufacturing index. This index increased in February to its highest level in 20 months. The weak economic activity of last summer has clearly passed as the resilient U.S. economy weathered many problems. Positive readings on this index indicate that more survey respondents see manufacturing activity expanding than see it contracting. If the U.S. economy were heading into recession, this index would probably be well below zero, not well above zero.
