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Economic Research: U.S. Business Cycle Barometer: Testing The Economy's Resilience

After expanding at an average rate of 5.7% the past year, U.S. real GDP contracted by 1.4% in the first quarter of 2022, increasing concerns that the world's largest economy is losing steam. The health of the U.S. economy is now being challenged by extremely high inflation and supply chain disruptions, further exacerbated by the Russia-Ukraine conflict and a new round of lockdowns in China. On top of that, the Fed plans to aggressively raise rates this year. In our Business Cycle Barometer publication, we look for early signals of a deceleration in growth momentum and recession.

Deterioration Of Near-Term Growth Prospects


Our dashboard of leading indicators through April signals that U.S. economic momentum continued to worsen. In April, seven of the 10 leading indicators we track sent negative or neutral signals (two were negative and five were neutral) on near-term economic growth prospects, a deterioration from November 2021, when eight out of 10 indicators were positive and the remaining three were neutral. (For details on what these signals mean, see the Appendix.)

While we do not currently expect a recession in the next 12 months, we recognize that risks have increased. Our qualitative assessment of recession risk over the next 12 months is 30% (within a wider range of 25%-35%). We see risks greater in 2023 as cumulative rate hikes take hold.

Term spread and quantitative risk of recession

In contrast, the term spread in our dashboard (the difference between 10-year and three-month Treasury yields) is still in positive territory, at 2.1% in April--not signaling a deceleration in growth momentum.

Indeed, our quantitative assessment of recession risk, based on our augmented term-spread risk model, indicates that the odds of recession in the next 12 months are currently under 3% (see chart 1), hitting a five-year low and consistent with a continuing expansion according to historical experiences. (For more on term spreads as growth signals, see "Despite Rising Risks, Yield Curve Is Not Yet Signaling Recession," May 4, 2022.)

Chart 1


Credit spread, S&P 500, and consumer sentiment

The financial market has also priced in a worsening economic outlook in the past few months, with the widening credit spread flashing neutral signals since March (see chart 4), and the large correction of the S&P 500 in negative territory for most of 2022 (see chart 5).

The Consumer Sentiment Index for May plunged to an 11-year low of 59.4 , suggesting that the index will remain in negative territory this month as well (see chart 6). This negative signal is a reminder that growing pessimism among households--as high prices eat away at their purchasing power--threatens the current economic expansion. Fortunately, still healthy household balance sheets through fourth-quarter 2021, as seen in our Financial Fragility Indicator, give households and businesses some cushion to absorb these shocks (see "Financial Fragility Of U.S. Households And Firms: Weaker In Fourth Quarter 2021, But Better Than Its Historical Average," April 7, 2022). But continued pricing pressure, now with higher interest rates, will slowly diminish this buffer.

Building permits and new orders index

Building permits softened at the start of the spring buying season in April, and the ISM PMI New Orders Index, while still above its 50-point neutral mark, indicating expansion, is growing at a much slower pace than earlier this year. Both indicators sent several neutral signals since January, indicating slower growth of real production activities in the pipeline (see charts 7 and 8). Continued supply chain constraints and waning demand for new homes, as a sharper increase in interest rates amid high prices dampens housing affordability, are major reasons behind the slowdown in goods sector activities.

Credit availability indicators

Deterioration in growth prospects also comes from the availability of credit. More banks tightened standards on loans in first-quarter 2022, especially to large and middle-market firms, turning growth signals from the Fed's April 2022 Senior Loan Officer Opinion Survey to neutral after a positive reading in its January 2022 report (see chart 9).

The National Financial Conditions Index (NFCI), at -0.2 in April, has gone up since the end of 2021 and almost touched its historical average of zero, indicating that the access to funds has waned in the past few months (see chart 10). The Financial Fragility Indicator (FFI), which was well under the historical average as of fourth-quarter 2021, indicated strong balance sheets for both households and businesses (see chart 11). That said, given the similar movements of NFCI and FFI we observed in the past, financial conditions of families and businesses may have also deteriorated since the start of 2021.

Real-time economic conditions

Fortunately, real time economic conditions are still supportive of economic growth. The leading indicators that respond rapidly to changing business conditions--jobless claims and the annual growth rate of freight transportation index--are still in positive territory (see charts 12 and 13).

Should We Be Worried? A Comparison With Past Business Cycles

In our analysis, seven out of 10 leading indicators in non-positive territory signal a weakening of economic conditions (see chart 2). Indeed, within one year before the previous three recessions in 2001, 2007, and 2020, the proportion of non-positive signals in our dashboard surpassed 60%.

But, while drifting away from positive territory is never a good sign, two negative signals in our April dashboard, on their own, are not a strong warning of an imminent recession. That said, based on our observation of past patterns, if the number of negative signals keeps increasing in the coming months, to above 40%, the U.S. economy may be singing a different tune.

Chart 2


Leading Indicators

Chart 3


Chart 4


Chart 5


Chart 6


Chart 7


Chart 8


Chart 9


Chart 10


Chart 11


Chart 12


Chart 13



Financial Fragility Indicator

We've added a new indicator, the Financial Fragility Indicator (FFI), to our analysis. It describes the health of balance sheets of households and businesses. The higher the index is, the worse the financial conditions of households and businesses. The indicator adds value to the dashboard because it describes the financial conditions of the real sector, unlike the Fed's loan survey and the National Financial Conditions Index (NFCI), which describe the easiness to access funds from banks and in the capital market. That said, NFCI and the Fed's loan survey are timelier than FFI, especially NFCI, which is published each week. The three indicators often move with each other, since financial conditions of borrowers are important determinants of the easiness to access funds via the financial system. (For more about FFI, see "The Financial Fragility Of U.S. Households And Businesses Hit A Decade Low In The First Quarter," July 30, 2021.)

Automated signal generation process

To improve the consistency and transparency of our dashboard, since September 2021, we have used an automatic quantitative decision rule to generate growth signals. The updated decision rule is based on judgments of our economists in the past when constructing the signals. Re-creating the dashboard using historical data can replicate previous manually generated signals by 81%.

Going forward, the automatically generated dashboard will be the baseline of our publication, though judgment is necessary--for example, when an indicator appears very close to the line separating the neutral and negative/positive territories. We would discuss our manual adjustments in the footnote of the dashboard.

Definitions of positive/neutral/negative signals
  • Positive: Overall economic activity will continue to expand in the near term, without an obvious slowdown.
  • Neutral: Overall economic activity will continue to expand but may be slower. Right after a recession, a neutral signal indicates that the recovery may have just started.
  • Negative: Overall economic activities will start to contract shortly afterward, roughly within a year.

Growth Signal Decision Rules
Indicator Decision rule Sample used to calculate percentile thresholds
Term spread
Negative: less than 0 1/1/1978-2/1/2020
Neutral: 0 to 40th percentile
Positive: above 40th percentile
Credit spread
Recession in the past 12 months: 1/1/1997–2/1/2020
Negative: above 90th
Neutral: 75th to 90th
Positive: less than 75th
Recession NOT in the past 12 months:
Negative: above 75th
Neutral: 40th to 75th
Positive: less than 40th
S&P 500 – month-over-month growth rate
Negative signal in the past 6 months: 1/1/1978–2/1/2020
Negative: below 10th
Neutral: above 10th
Negative signal NOT in the past 6 months:
Negative: below 10th
Neutral: 10th to 25th
Positive: above 25th
Consumer sentiment - month-over-month growth rate, three-month moving averages
Negative signal in the past 12 months: 12/1/1982–2/1/2020
Negative: below 10th
Neutral: above 10th
Negative signal NOT in the past 12 months:
Negative: below 10th
Neutral: 10th to 15th
Positive: above 15th
Jobless claims – adjusted by labor force
Negative: above 75th 1/1/1978–2/1/2020
Neutral: 50th to 75th
Positive: less than 50th
Freight transportation index – annual growth rate
Negative: below 10th 1/1/2000–2/1/2020
Neutral: 10th to 15th
Positive: above 15th
Building permits (single-family) – annual growth rate
Negative: below 25th 1/1/1978–2/1/2020
Neutral: 25th to 40th
Positive: above 40th
ISM (MFG) new orders index
Negative: below 50 1/1/1978–2/1/2020
Neutral: 50 to 52.9
Positive: above 52.9
Financial Fragility Indicator
Recession in the past 12 months: 1987Q1–2020Q1
Negative: above 90th
Neutral: 85th to 90th
Positive: less than 85th
Recession NOT in the past 12 months:
Negative: above 85th
Neutral: 70th to 85th
Positive: less than 70th
Fed’s loan survey
Recession in the past 12 months: 1996Q1–2020Q1
Negative: above 80th
Neutral: 25th to 80th
Positive: less than 25th
Recession NOT in the past 12 months:
Negative: above 50th
Neutral: 25th to 50th
Positive: less than 25th
Chicago Fed National Financial Conditions Index
Negative: above 65th 12/1/1982–2/1/2020
Neutral: 40th to 65th
Positive: less than 40th

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
Contributors:Shuyang Wu, Beijing
Joseph Arthur
Research Contributor:Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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