Moody’s Monthly Probability of a Recession has Rise to 52% in the Next Twelve Months

By | August 26, 2019

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Coffee and Economic Review

World stock markets and the dollar rose on Friday as investors look forward to a speech by Federal Reserve chair Jerome Powell. The markets are looking for clarification on whether the U.S. central bank remains on course to deliver another interest rate cut next month. Suggesting markets remain broadly confident of further Fed easing, European stocks on Friday rebounded from the previous day’s decline, with the pan-European STOXX 600 gaining as much as half-a-percent in early deals. The MCSI’s broadest index of stocks outside of Japan, edged 0.3% higher for the day and was up 1.0% for the week.

Wall Street plunged on Friday as the trade war escalated in dramatic fashion. All three major indexes ended Friday sharply lower and posted their fourth weekly consecutive declines. The Dow Jones Industrial Average fell 623.34 points, or 2.3% to 25,628.9, while the S&P 500 lost 75.84 points, or 2.59% to 2,847.11. The day started when Chine announced retaliatory tariffs on $75 billion of U.S. goods, prompting the president to demand U.S. companies move production out of China. The retaliation by China was expected after Trump announced new tariffs that were to start on September 1. Later in the day, he announced additional tariffs of on $250 billion of Chinese imports be increased from 25% to 30%. Businesses are already struggling with the existing tariffs and it appears that neither China, or Trump will give in. The probability of a recession increased significantly if businesses start to layoff workers.

The dramatic events overshadowed a speech in Jackson Home by Fed Chief Jerome Powell. The Fed chair gave markets mostly what they wanted to hear that the risks to the outlook have increased significantly and the central bank will act as “appropriate” to sustain the expansion. Markets overwhelmingly expect a rate cut next month, with the futures market pricing in a 98.8% probability of a rate cut in September. A key theme in Powell’s speech was that there are no recent precedents to guide any policy response to the current situation of heightened trade policy uncertainty. He noted that any policy is a powerful tool to support consumer spending, business investment and public confidence, but it can’t provide a “settled rulebook for international trade.” It is unclear how further increases in trade policy uncertainty will affect the greater economy. Trump lashed out at Powell and added to the uncertainty about the independence of the Federal Reserve and the fate of the Fed Chairman.

Last week was light on economic data. Existing home sales rose 2.5% in July to a 5.42 million annual pace. Year-over-year sales rose 0.6% and was the first positive y/y outcome since early 2018. Sales were weak last year but have been trending up recently. New homes sales dipped 12.8% in July, but sales were revised up significantly in June to 728,000, the strongest pace since 2007. Next week will be busier on the economic calendar. We get a look at durable goods orders, GDP second estimate for the second quarter, international trade in goods and personal income and outlays. The events of the past week have raised downside risks. Moody’s monthly probability of a recession has rise to 52% in the next twelve months. Other forecasters will be raising their downside risks in coming days. With Trump and China not giving an inch, the cooler skies of Fall are about to get much colder.

Latest Data

The U.S. Economy:

Existing home sales recovered in July, with sales rising 2.5% and were 0.6% higher than in July 2018. Sales equaled an annualized total of 5.42 million, up from 5.29 million in June. The increase was led by single-home sales, which totaled 4.84 million in July, up 1% from July 2018. Condo/coop sales were about flat I July at 580,000, down 3.3% from a year earlier. Listings did not keep up with sales, so the inventory-to-sales ratio moved closer to a record low. Listings of single-family homes totaled 1.67 million in July, down 1.8% from June and down 1.8% from July 2018. The inventory-to-sales ratio for single-family homes was 4.1 months in July, down 0.2 months from June and down 0.2 months y/y. The seasonally adjusted median price of existing home sales was $271,050 in July, up 1.8% from June and up 4.5% from July 2018.

The Conference Board’s index of leading economic indicators strengthened recently, rising 0.5% in July, following a 0.1% decline in June. Building permits and unemployment made the largest contributors to the top-line figure in July, increasing by 0.16% and 0.23%, respectively. The average workweek for manufacturing workers, ISM new orders, manufacturers’ new orders and the interest rate interest rate spread each had a negative impact on the index. The labor market was positive in July. On net, financial markets were positive for the month. The 3-month leading indicator rose 0.2% for the month. Industrial production fell in July after two positive months. The coincident indicator rose 0.2%, suggesting the near-term outlook for the economy looks good.

New home sales tumbled in July, falling 12.8% to an annual pace of 635,000. New home sales remained up 4.3% from July 2018. Given the volatility of this series, large movements month-to-month are common. June sales were revised up 728,000 from 646,000, offsetting much of the decline for July’s total. The market loosened considerably in July due to the fall in sales. Inventories for single-family homes increased 1.2% in July, up 7.3% from July 2018. The inventory-to-sales ratio for single-family homes was 6.4 months in July, up 0.9 of a percentage point from June and up 0.2 from July 2018. Despite the large swings in sales month-to-month, sales are still up year-over-year. The median price of an existing single-family versus new prices peaked at over 30% in 2017 ad has fallen 17% as of last month. That reduces price pressures for the existing home market and may help the affordability issue.


The Euro-zone’s business growth picked up a touch in August, helped by brisk services activity as manufacturing contracted at a slower pace. HIS Markit’s Euro-zone Composite PMI climbed in August to 51.8 from 51.5 in July. The composite future output index measuring overall business optimism sank to 55.5 from 58.8, the lowest reading since May 2014. The service PMI rose to 53.4 from July’s 53.2. Factory activity rose to 47.8, up from 46.9 in July, but was the seventh month n a row of contraction. The dynamics of the euro-zone economy did not change in August, with solid growth in services continuing to hold the economy’s head above water despite the manufacturing decline. Combined with other data, GDP growth will only be between 0.1% and 0.2% for the third quarter so far.

Important Data Releases This Week

July durable goods orders will be released durable goods orders will be released on Monday, August 26 at 8:30 AM EDT. A surge in capital goods orders was the highlight of a strong 2.0% advance in June durable goods orders. We forecast a 1.1% increase in the headline number and for core capital goods to remain unchanged.

Real GDP for the second quarter (second estimate) will be released on Thursday, August 29 at 8:30 AM EDT. We project a slight downward revision to 2.0% for Q2, down from 2.1%. Consumer spending will remain unchanged at 4.3%.

July international trade in goods will be released on Thursday, August 29 at 8:30 AM EDT. We see the trade deficit being unchanged at $74.2 billion. Imports and exports fell sharply in June.

July personal income and outlays will be released on Friday, August 20 at 8:30 AM EDT. We project a 0.3% advance for personal income for July, slightly down from the 0.4% advance in June. Spending will pick up to 0.5%, up from 0.3% in June. The PCE deflator will rise 0.3%, up from the 0.1% advance in June. The core PCE deflator will rise 0.2%. This will bring the headline PE deflator up 1.5% and the core index up 1.7% y/y.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.