Despite fears from market participants over the possibility of a downturn, the likelihood of a U.S. recession in 2020 stands at roughly 20% when models emphasize data pertaining to the real economy, according to Catherine Mann, managing director and global chief economist at Citi.
"The more real-side indicators you have in your model, the lower your probability of recession next year for the U.S.," Mann said Oct. 17 during a panel discussion at the Institute of International Finance, or IIF, annual membership meeting in Washington, D.C. "But if your model is fundamentally driven off of financial-side indicators, you're ending up with a much higher probability than that."
Recession concerns among global fund managers climbed to a decade-high in September, according to BofA Merrill Lynch International Ltd.'s Global Fund Manager Survey, with 38% of investors surveyed expecting a recession over the next 12 months.
The U.S. experienced prolonged bouts of yield inversion between 10-year and 3-month Treasury securities, a traditional marker of impending recession. Despite this, the Bank for International Settlements said in its latest quarterly review that investors should be cautious in assessing the inversion as a sign of a recession.
Paul Gruenwald, S&P Global Ratings' chief economist, said his group's estimate for a 2020 recession hovers between 30% and 35%, noting the push-pull factors of a strong labor market and consumer spending and a weaker manufacturing sector in the U.S.
"If we continue to see strong performance in the labor market, if people think they're going to have jobs, households continue to spend, then manufacturing's going to have to respond to that," Gruenwald said. "If, on the other hand, this weakness we see and all the uncertainty about U.S.-China trade and other stuff starts to filter into consumer sentiment, we see households pulling back, maybe the labor market weakens, then we go into the downside."
Monetary policy outlook
Even if the likelihood of a recession is smaller than markets have feared, the Federal Reserve's recent run of accommodative monetary policy has been warranted, according to Brian Sack, director of global economics at the D.E. Shaw Group.
Sack said the two 2019 rate cuts, coupled with an expected cut from the central bank at the end of the month, are justified by the drag that global trade tensions have had on growth.
"The shift in the expected outlook for GDP, given the drags of trade, is sufficient to justify two or three rate cuts," he said.