Once again recession talk is in the air, this time given loft by the weak May job growth figures. Nonfarm payrolls rose by only 38,000 in May, down from an average of almost 220,000 per month over the past year and the weakest performance in almost six years. Another sign of a looming recession? Economic bears point out that job growth has declined in each of the past three months since last breaching the 200,000 mark in February. Moreover, this deceleration is consistent with the exceptionally weak first quarter GDP (although that GDP growth estimate has been revised modestly higher from 0.5% to 0.8%).
Also worrying: Growth in nonmanufacturing (services) economic activity slowed in May. The Institute for Supply Management (ISM) said its index of services activity fell to its lowest level since February 2014, though the index remained above the level associated with positive growth.
Moreover, a variety of analysts are raising their odds of a recession starting within the next year. One model from UBS based on credit risk pegs the recession risk at 34% by the first quarter of 2017. Perhaps most alarming is a model from Deutsche Bank that suggests the yield curve is now signaling a 55% of a U.S. recession within the next 12 months, although many analysts discount the yield curve as a predictive tool because global demand for scarce Treasury notes and bonds is driving down long-term rates and hence the yield gap between short- and long-term rates.
But these recession models seem to be outliers. Economists polled by the WSJ see about a 20% chance of being in a recession within the next 12 months – double the odds from one year ago but essentially unchanged since February. There has also been positive economic news over the past two weeks. While the growth in services has been dropping (though remaining positive), the ISM reported that its manufacturing index rose for the third straight month and is now firmly back into positive growth territory.
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Andrew J. Nelson is Chief Economist for Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.