The U.S. economy saw some good news last Friday. The U.S. Department of Labor reported that the unemployment rate dipped to 4.9%—the first time the rate has dropped below five percent since February 2008. U.S. wages also picked up as employers increased hours for workers. So, is it time to put recession fears to bed?
Not so fast says JPMorgan’s economic research team.
According to Bruce Kasman, David Hensley, and Joseph Lupton, a number of factors are contributing to an increased risk of an economic slowdown in the upcoming quarters.
The analysts noted that margins of U.S. corporate earnings are being squeezed and productivity is stagnant. On top of this backdrop, this week’s expected report that 2015 fourth-quarter productivity will dip from year-ago levels will contribute to a 10% drop in corporate profits from a year ago. (Source: “JP MORGAN: US recession risk is growing,” Business Insider, February 8, 2016.) Kasman, Hensley, and Lupton noted that unless an economy is in a recession, a double-digit decline in corporate earnings is a rare occurrence, having only struck twice in the last half century.
The analysts added that a 10% year-over-year drop in corporate earnings is usually followed by a slowdown in business spending and labor hiring, leading to an increased probability of a recession. (Source: Ibid.)
“With the drag on U.S. earnings intensifying and business spending softening, the risks of a broader business pullback remain elevated. Our U.S. recession probability tracker has moved higher in recent weeks, reinforcing this point,” wrote the analysts.
As a result of the current economic environment, JPMorgan’s recession probability tracker now calculates about a 25% chance of a recession in the U.S. economy occurring in the next 12 months. This is up from about seven percent since mid-2015.