According to JP Morgan’s economics team, US GDP is on track to grow 2-1/4% in 2016.
“Fed rate hikes won’t break the back of growth,” they said in a new note to clients.
But that’s not to say it may all turn around in the next few years.
“Our longer-run indicators, however, continue to suggest an elevated risk that the expansion is nearing its end, and our preferred model now puts the probability of recession within three years at an eye-catching 76%,” they continued.
The economists — Michael Feroli, Daniel Silver, Jesse Edgerton, and Robert Mellman — use a combination of 9 different indicators from consumer sentiment to the unemployment rate to develop a short- and long-term recession probability.
“When we first wrote, only manufacturing sentiment was signalling an above-average probability of imminent recession,” they said. “But recent weakening in the Richmond Fed services survey and the ISM nonmanufacturing index have now pushed the nonmanufacturing sentiment probability up somewhat as well.”
In the short term, the note says that the 6-month likelihood is only 5%, but within a year it stands at 23%, in two years 48%, and in three years the “eye-popping” 76%.
The biggest increase in the recession probability, according to the economists, has come from corporations.
“The particularly sharp moves in predicted recession probabilities since mid-2014 have been driven most prominently by our measure of the decline in margins,” said the note.
“Indeed, on most (but not all) of the occasions when this variable fell to its current level, a recession began within a few years. Although continued expansion remains our baseline forecast, we will more carefully investigate the risks of recession emanating from the corporate sector.”
For now, said the JP Morgan economists there isn’t a high chance that the economy suddenly plunges downhill, but being wary may not be a bad idea.
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