MacroResearchBoard

Sentiment Indicators Driving U.S. Deterioration – May 1, 2023

A recently-published report updated our views on the odds of recession for the U.S. economy, where economic prospects have been perceived to have taken a meaningful hit following the spike in U.S. banking sector stress in March. A timely policy response soothed investors’ fears regarding the banking sector’s health. Still, the elevated banking stress took a toll on economic sentiment, at a time when the momentum in several economic gauges was already aligned with historical recessionary trends. Notably, the MRB U.S. Recession Checklist Indicator (RCI) also rose above its “typical” recessionary threshold in March, for the first time in this expansion.

Despite these developments, MRB is still not forecasting a recession over the next year. The broad rationale behind our unchanged recession call includes the fact that the above-average recession risks do not capture structural factors that will provide important growth support. Moreover, the apparent deterioration of economic momentum this year was driven entirely by sentiment gauges, while overall hard activity improved. The (subjective) pessimism reflected in sentiment-based survey data is biasing perceived recession odds upward, and some discounting of those odds is therefore warranted.

Furthermore, private sector balance sheets, which are not normally incorporated into cyclical recession gauges, are unusually healthy, and imply that the bar for economic stress to snowball into a recession is higher in this cycle than in the past. Indeed, monetary policy prospects have shifted in a net growth-supportive direction following the rise in banking sector stress in March, although the stress has since ebbed.