Why the next US recession appears a long way off, in one chart

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  • US labour market sentiment currently sits at the highest level since 2001.
  • Prior US recessions have often coincided with a steep decline in sentiment levels.
  • RBC Capital Markets says recent data points “to a sustained economic expansion”.

Now here’s an interesting chart you might want to file away for when the next bout of US recession talks hits.

From RBC Capital Markets, it shows the labour differential, the spread between respondents stating that jobs are “plentiful” against those saying jobs are “hard to get”, from the US Conference Board’s monthly consumer confidence report.

The reading is overlaid against periods of US recessions, shaded in grey.

Source: RBC Capital Markets

As Tom Porcelli, chief US economist at RBC Capital markets notes, the labour differential has been a fairly accurate guide as to when a US recession is likely to hit in the past.

“We like to look at this metric against its 2-year moving average as momentum in consumer labor market sentiment has been a good indicator of looming economic downturns historically,” he says.

“At present, it remains far from even suggesting that we are in a full blown ‘late-cycle’ expansion.”

Based off the latest reading for March, seeing the differential rise to the highest level since May 2001, Porcelli says it suggests the chance of an economic downturn arriving within the next year is close to the lowest level on record based on his recession modelling.

“When we throw this metric into our recession probability model framework, it suggests the odds of a downturn within 12 months are about 10% and near the all-time lows for this indicator,” he says.

“Despite rising fears of trade tensions and other geopolitical rumblings, US economic fundamentals continue to point to a sustained economic expansion.”