JPMorgan Warns Of "Eye-Catching" 76% Probability Of Recession

Tyler Durden's picture

Just days ago Citi pronounced, much to the chagrin of the status-quo-hugging Fed faithful, that given the turn in corporate profits (and concerns over margin sustainability) that the chance of a recession in the US had risen to 65% (and on that basis had a bearish outlook for US equities). Now, as other major sell-side shops jump on the equity un-bullish narrative, JPMorgan's Michael Feroli warns that in the past, a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end... and puts the probability of a US recession within 3 years at 76%. Of course, you do not need to worry, because Janet Yellen said this is not true (though failed to provide here reasoning).

 

As Citi recently noted the cumulative probability of a recession in the next year rises to 65%.

In the US our chief concern is margin sustainability. Corporate profits as a share of GDP have been at all-time highs, which is just another way of saying the rewards to labour have been at all-time lows. But change may be afoot in the form of modest labour market tightening in the US.

 

 

It is too soon to see this show up in core (ex Fins, Energy and Materials) margins in the US but that may be where things go. Modest nominal wage acceleration combined with global disinflation (price taking by US firms) and lack of productivity growth may mean margins come under pressure from labour costs.

And now, JPMorgan's Mike Feroli raises a red flag warning that:

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%.

As he details...

We recently developed two sets of models for assessing the risk that the next recession will start within given horizons. One was focused on high-frequency indicators and aimed to measure the probability of a recession starting within six months. The other aimed to capture longer-run cycle indicators that suggest an elevated background risk of the expansion ending within horizons of one to five years.

 

Table 1 updates our models’ assessments of the probability of recession beginning within six months from our recent note. When we first wrote, only manufacturing sentiment was signaling an above-average probability of imminent recession. 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. Nonetheless, estimates that combine signals from multiple indicators continue to predict little overall recession risk, and we conclude that the chance of a recession beginning within sixmonths is 5% or less.

 

 

In our work on longer-term risks, we found that a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end.

 

Figure 8 shows that probabilities of recession within 1, 2, and 3 years predicted by models based on these four variables have recently moved up to 23%, 48%, and 76%, respectively.

 

 

Although all four variables have moved in the direction of increased risk in recent years, the particularly sharp moves in predicted recession probabilities since mid-2014 have been driven most prominently by our measure of the decline in margins (which we define as the decline in the 4-quarter moving average of nonfinancial corporate net operating surplus as a percent of net value added, as a fraction of its peak in the current expansion). Figure 9 shows the history of this variable over the postwar sample period. 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.

 

*  *  *

So first Citi, and now JPMorgan warn that there is a significant and growing chance that the US economy contracts next year? According to Janet Yellen, who was asked precisely this question during her hearing in Congress today, there is no risk: according to her, she doesn't see the recession risk as "anything close" to 65%. She did not provide a number which she thought is more appropriate.

She also said that the FOMC would only raise rates as long as policy makers think U.S. will "enjoy at least some above-trend growth" that would result in improving labor market.. 

Her conclusion: if the rate hike results in "unintended consequences" the Fed can always just lower rates. Which incidentally is precisely what the Fed did in last 1936 when it, too, erroneously decided the economy was strong enough to sustain a tightening of financial conditions...

... only to cut immediately. The collateral damage? The Dow Jones plunged 50% the next year...

... and unleashed a severe recession in the second half of 1937, followed a few year later by the start of World War II.

This time is not different.

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Baronneke's picture

Feb. 2016: Rates will be lowered after a small rise in December this year.  Neg. rates will soon follow.  The stock-markets will go down the drain.

Noplebian's picture
Noplebian (not verified) Baronneke Dec 5, 2015 6:23 PM

It's all BS....The issuance of fiat currency with added interest and the people who are then able to steal all the s**t they want without actually working, should be exterminated....and no I'm not a socialist!

http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...

Macchendra's picture

Stay credible my friends.  Anyway... if I can print money, then you are my slave.

Baronneke's picture

Update:  And when the markets go down the drain........banksters will be hanged, including Fed. officials.

 

stant's picture

Thanks for the heads up jp

ebworthen's picture

The recession (depression) ended only in charts.

.National Suicide 1980's picture

76% chance JP Morgan executives will be running away from angry mobs in the next few years.

kill switch's picture

>>Depression

>>Recession

Are we presently in a Depression or a Recession?

 

 

opport.knocks's picture

A Kondratieff Winter projected to last until 2020.

http://www.zerohedge.com/news/2014-10-08/things-make-you-go-hmmm-perfect...

WWIII and/or a nuclear winter could change the end date considerably.

Yen Cross's picture

   These fucking bankers are worse then the Hare Krishnas at the airport... They fold like cheap card tables, everytime the Fed. says anything remotely hawkish. lmao

Sudden Debt's picture

Within A Few Years???!!!!!!

I'VE GOT PUT OPTION EXPIRING IN 4 MONTHS!!!

USSLiberty's picture

I wouldn't put too much stock into what these banks put out to the public. When they say "3 yrs", too me that says "We don't have a fucking clue how long."

What I do know is the "fundamentals of the economy" STINK, and JPM has been buying silver, physical silver. Along with China, Russia, India and just about everybody else buying gold and silver bullion.

I'm thinking I should be able to buy a private Greek island with mine, after this house of cards collapses. Hopefully that island isn't overrun with starving Arabs and Africans!

 

 

Flatchestynerdette's picture

Just days ago Citi pronounced, much to the chagrin of the status-quo-hugging Fed faithful, that given the turn in corporate profits (and concerns over margin sustainability) that the chance of a recession in the US had risen to 65% (and on that basis had a bearish outlook for US equities). Now, as other major sell-side shops jump on the equity un-bullish narrative, JPMorgan's Michael Feroli warns that in the past, a low unemployment rate, rising compensation, falling margins, and elevated durables investment have historically signaled an elevated risk that an expansion is nearing its end... and puts the probability of a US recession within 3 years at 76%.

Exactly SuddenDebt:

This is forecasted within 3 YEARS! They can't tell you what's going to happen Monday let alone Dec. 31st 2015. Why? B/c these 'forecasts' are meaningless when you have the Fed calling Goldman Sucks to buy s&p calls at 3:57pm ramping it up every day. The Fed won't let GS go down the toilet ergo the party goes on even if they increase yields to 100bps before the general election. This way if a republican gets elected he's hit with a recession right away. If its Hillary they can take the 100bps and drop it down getting her out of trouble.

gregga777's picture

Those who can, do;
Those who can't do, teach;
Those who can't teach, tell everyone else how to live.

Janet Yellen is an over-educated cipher. She has spent her entire life in academia and government. She has never accomplished anything in the real world.

Niall Of The Nine Hostages's picture

Janet owes her success to the same thing Hillary does. Marrying the right upwardly mobile man.

In Janet's case it's economist George Akerlof. Akerlof co-wrote, or rather ghostwrote, most of his wife's papers.

malek's picture

Can we now also have JPMorgan's probability of a US recession within 30 years?

Sudden Debt's picture

Actually figure 8 gives it a 77% chance of a recession in 2016. And that graph sucks on so many ways.

ajkreider's picture

3 years?!  We should be so lucky.

Niall Of The Nine Hostages's picture

Short version: corporate profits as a share of corporate "net value added" is declining, a sign of trouble ahead, so pretty please Janet don't raise interest rates.

Even from JPM's chart I don't see much relationship between the drop in margins and the size of the recession. Someone came up with this who knew how to run a linear regression but didn't really ever learn how economies work.

In particular, if corporate profits are falling, it's not because wages are rising, at least not in the US. 

The low unemployment rate reflects white men dropping out of the formal labour force, not a hiring boom. As a ZH article pointed out today, there's been no growth in hours worked in the US these 15 years and fewer jobs every year on which white men of modest backgrounds could earn enough to feed and house their families. There's been no significant wage growth in 30 years.

No, Janet won't be able to raise rates till we see signs of real growth---that is, working-class white men finding good jobs permitting real improvements in their living standards. 

mcsean2163's picture

Just been searching for this around the web, ZH & BI only.

 

Is it true, source please.

thecodeisbroken.wordpress.com

CHoward's picture

3 years.  3 years?  3 years?!? 

 

Now that is funny!!!!!!!!!!!!!

uhland62's picture

Not surprised. The economic textbooks haven't changed and if you keep working along the textbook guidelines that are proven not to work, it ain't working fullstop. Why expect a different outcome when doing the same things over and over and over again?  

uhland62's picture

I forgot to say, help is on the way. There needs to be new bomb manufacture as the stock is about to be used up by the Syrian mission before it's accomplished.

fowlerja's picture

I think the analyst gave away too much information... cause he could have told Jamie Dimon and JP Morgan could have made a bunch of money on his 76% prediction..but he screwed up and let the cat out of the bag...Jamie is going to be pissed!

kappal_toba_dhurr_ne_thook's picture

More like recepression.  USA passed the  point of recession a long, long time ago.

brushhog's picture

So now falling unemployment, and rising wages are BAD? Is there any bit of data that wont be spun into recession/collapse?