U.S. Recession Risk Monitor - Fourth Quarter 2018 - BBVA Research
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U.S. Recession Risk Monitor U.S. Recession Risk Monitor Fourth Quarter 2018
U.S. Recession Risk Monitor 4Q18 Highlights The probability of an economic recession within the next 12 months remains low Alternative models show increasing likelihood but also indicate relatively low probability Overall financial conditions remain accommodative. However, a sharp correction in equities and corporate spreads is possible Economic fundamentals for households and financial institutions remain solid Downside risks for nonfinancial businesses and real estate continue edging up amid high leverage ratios and rising interest rates Increasing uncertainty from turbulent global financial markets
U.S. Recession Risk Monitor 4Q18
Recession Probability
Our models indicate recession probability is low
BBVA Recession Probability Explanatory Factors
%, 12-months ahead Percentile Rank
100 100
90 90 Tipping Point
80 80
70 70
60 60
50 50
40 40
30
30
20
20
10
10
0
0 Wages Shadow Slope Personal Int CAPE
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Banking Expense
Source: BBVA Research and Haver
3U.S. Recession Risk Monitor 4Q18
Recession Probability
BBVA Treasury Spread Term-Premium Adj. Treasury Spread
%, 12-months ahead %, 12-months ahead, NY Fed
100 100
80 80
60 60
40 40
20 20
0 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Dynamic-Factor Markov-Switching Model Survey of Professional Forecasters
%, 12-months ahead, StL Fed %, Decline in real GDP next quarter, Philly Fed
100 100
80 80
60 60
40 40
20 20
0 0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: BBVA Research, NY Fed, St. Louis Fed, Philadelphia Fed and Haver
4U.S. Recession Risk Monitor 4Q18
Financial Markets
Financial Stress Indicators Financial Stress Index
>0 = tighter than average Above 0 = above average stress
4 8
Last (+/- 2sd)
2 6
0 4
-2 2
-4 0
-6 -2
Credit Equities Safe Funding Volatility Risk Leverage
assets (nonfin)
93 94 95 97 98 00 01 02 04 05 07 08 10 11 12 14 15 17 18
Cyclically Adjusted Price Earnings Ratio Corporate Spreads
1Q18=100, S&P 500 Basis points
145 750 5000
130 650 BBB CCC (rhs)
4000
115
550
100 3000
85 450
70 2000
350
55
250 1000
40
25 150 0
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 08 09 10 11 12 13 14 15 16 17 18
Source: BBVA Research, OFR, KC Fed, R. Shiller, ICE and Haver
5U.S. Recession Risk Monitor 4Q18
Households
Liabilities/Disposable Income Interest Payments/Personal Income
Ratio %
Nonfarm Payroll Delinquency Rate
YoY % Change %
Source: BBVA Research, Federal Reserve, BLS, BEA and Haver
6U.S. Recession Risk Monitor 4Q18
Businesses
Nonfinancial Corporate Profits Nonfinancial Business Debt
% of GDP % of GDP
Nonfinancial Corporate Short-term Liabilities C&I Loan Charge-Off Rate & Fed Funds
YoY % Change %
Source: BBVA Research, Federal Reserve, BEA and Haver
7U.S. Recession Risk Monitor 4Q18
Real Estate
Housing Starts and New Home Sales Housing Affordability and Prices
Thousand units, annualized Index and YoY % Change
2500 20 250
Starts Sales HPI Affordability (rhs)
2000
10 200
1500
0 150
1000
-10 100
500
0 -20 50
74 78 82 86 90 94 98 02 06 10 14 18 74 78 82 86 90 94 98 02 06 10 14 18
BBVA Real Estate Prices Misalignment Nonresidential Construction
1990=100 YoY % Change
160 30
145 20
Residential Commercial 10
130
0
115
-10
100
-20
85
70
74 78 82 86 90 94 98 02 06 10 14 18
Source: BBVA Research, Federal Reserve, Census, BEA and Haver
8U.S. Recession Risk Monitor 4Q18
Financial Institutions
Deposits and Capital Ratios Loan Reserves
% of loans and assets, commercial banks % of total loans, all FDIC institutions
120 14 4.0
Core Deposits/Loans
110 13 3.5
Tier 1 Capital (rhs) 3.0
100 12
2.5
90 11
2.0
80 10 1.5
70 9 1.0
94 96 98 00 02 04 06 08 10 12 14 16 18 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Noncurrent Loans and Funding BBVA Credit Cycle Risk Index
% of loans and liabilities, , commercial banks Above 0 = above average risk
1.0
Noncurrent Noncore funding (rhs)
6.0 24
5.0 0.5
20
4.0
3.0 16 0.0
2.0
12 -0.5
1.0
0.0 8 -1.0
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 82 85 88 91 94 97 00 03 06 09 12 15 18
Source: BBVA Research, FDIC, Federal Reserve and Haver
9U.S. Recession Risk Monitor 4Q18
Prices
Labor Costs Nonlabor Costs per Unit of Real GDP
YoY % Change, ECI YoY % Change
Market Inflation Expectations BBVA Inflation Regime Probability
% Regime change low to high
100%
80%
60%
40%
20%
0%
61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Source: BBVA Research, Bloomberg, BLS, BEA and Haver
10U.S. Recession Risk Monitor 4Q18
Global Conditions
Gold Prices Real Oil Prices
YoY % Change YoY % Change
75 200
50 150
100
25
50
0
0
-25 -50
-50 -100
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Net Foreign Purchases of U.S. Securities Global Activity Leading Indicator
US$bn, 3mma, excluding OFIs and Int’l organizations YoY % Change
120 10
100 8
80 6
60
4
40
2
20
0 0
-20 -2
-40 -4
989900010203040506070809101112131415161718 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Source: BBVA Research, Treasury, OECD and Haver
11U.S. Recession Risk Monitor 4Q18
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