Forget the recession talk -- ANZ thinks the US economy is looking 'rosy'

Photo by Jamie Squire/Getty Images

It’s been a long time since the US economy has been in recession. Some 102 months, in fact.

The current economic expansion is the third-longest since the end of World War 2, only surpassed by a period in the late 1960s and the late 1990s and early 2000s.

If it continues that way over the next four months, it will become the second-longest expansion over that period.

Here, look.

Source: ANZ

However, while the US economy is looking good right now, growing at a seasonally adjusted rate of 3.2% in the September quarter, there’s a growing unease that the current economic expansion could come to an end, potentially as early as next year.

A flattening in the US yield curve, seeing the differential between two and 10-year bond yield narrow to the lowest level in several years, has seen some warn that a recession could be nearing, pointing out that whenever the US yield curve has gone negative — with 10-year yields below two-year yields — it’s almost always predicted an economic downturn.

While some are fretting about the prospect of a near-term recession, Tom Kenny, Senior Economist at ANZ Bank, isn’t overly concerned about the flattening in the US bond curve, noting there’s a variety of other indicators out there that suggest the economic expansion has further to run yet.

“ANZ’s Recession Index — based on a latent trend in activity and financial conditions — suggests the likelihood of a recession in the coming year is a low 1.9%,” he says, pointing to the chart below showing the relationship between the index and prior recessions based on the National Bureau of Economic Research’s (NBER) methodology.

Source: ANZ

Just 1.9%.

And Kenny says it’s not just ANZ’s index that suggests near-term recession risks are low.

“The fundamental backdrop of the US economy is highly favourable, as highlighted by the NBER’s key business cycle indicators, which are all trending higher,” he says.

“Significantly, labour market conditions remain robust and consistent with above-trend hiring and further falls in the unemployment rate.

“The positive economic fundamentals combined with fiscal stimulus point to a rosy picture for US growth in 2018.”

Source: ANZ

On the flattening of the US yield curve, Kenny says that other models that use this as an input suggest that recession risks are higher. And given the likelihood that the yield curve will flatten further next year should the Fed continue to lift interest rates, he expects the risks — at least according to these models — will increase, potentially creating even more chatter about the prospect of an economic downturn.

“Yield curve recession-based models are suggesting an increased likelihood of a recession in the year ahead following a flattening in the yield curve in recent months,” Kenny says.

“The New York and Cleveland Fed models imply the probability of a recession in the next year is at 11.0% and 14.3% respectively. Both these model estimates are the highest they have been for a number of years.

“Given some further narrowing in the yield curve is likely, these probabilities are set to rise.”

While Kenny admits that the yield curve has been a reasonably good predictor of recessions in the past, given the period of unprecedented monetary policy easing we’ve seen over the past decade which is now only just starting to be unwound, there’s a need for caution.

“There are a number of factors affecting longer term yields this time round, which suggest some caution may be required in extrapolating history,’ he says.

“As US Federal Reserve Chair Janet Yellen recently said of this relationship, ‘correlation is not causation’.”

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.