Tag: recession

Business Cycle Report (June 26, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy extended its expansion in May, with the composite economic index remaining above contraction territory for the fourth consecutive month. While financial conditions broadly improved, the goods-producing sector sent mixed signals and the labor market showed tentative signs of softening. Against a backdrop of lingering tariff uncertainty, we are closely monitoring labor market conditions and goods production for early indicators of economic stress.

Financial Markets

Investors largely shrugged off trade tensions amid progress in negotiations with China, the UK, and India. Optimism that tariffs may not escalate further buoyed risk sentiment, fueling rallies in major tech stocks. Meanwhile, rising sovereign debt concerns in developed markets pushed long-term Treasury yields higher, steepening the yield curve. As a result, the financial spread moved into positive territory for the first time in three months — a potential signal of improving growth and inflation expectations.

Goods Production & Sentiment

The goods-producing sector was the economy’s softest segment in May, with three of the four key diffusion indicators in contraction. Consumer sentiment remained subdued due to persistent inflation expectations and tariff uncertainty. Housing construction slowed under pressure from elevated interest rates and rising material costs. While a proxy for investment spending improved slightly, it remained in contraction territory. Business surveys indicated lingering supply chain pressures, with slow delivery times suggesting a sustained demand for factory goods.

Labor Market

The labor market continued to moderate but remains robust by historical standards. The unemployment rate held steady at 4.2%, suggesting that while labor conditions have eased from their peak, they remain tight. However, initial jobless claims rose noticeably and payroll growth slowed in May, both early signs that employers may be scaling back hiring. For now, the data does not yet warrant policy intervention, but further softening could shift the Fed’s outlook.

Outlook & Risks

The economy continues to demonstrate resilience, supported by steady consumer and business spending. However, much of this strength may reflect drawdowns of pre-tariff inventory stockpiles. While we do not anticipate a near-term recession, the critical question is whether firms can absorb higher tariff costs through compressed margins or would they be able to pass them on to consumers without stifling demand. The coming months will test the economy’s ability to adapt to these persistent headwinds, but we still think this remains a good time to increase risk exposure.

The Confluence Diffusion Index for June, which encompasses data for May, remained slightly above the recovery indicator. However, the report showed that four out of 11 benchmarks are in contraction territory. Using May data, the diffusion index improved to -0.0303, above the recovery signal of -0.1000.

  • Stocks gained momentum as progress in trade negotiations boosted investor sentiment.
  • Rising input costs continue to weigh on the manufacturing sector.
  • A noticeable uptick in jobless claims points to a potential softening in the labor market.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

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Asset Allocation Bi-Weekly – The Economy That Won’t Die (June 16, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The old Wall Street quip about economists having “predicted nine of the last five recessions” has never felt more painfully relevant. Since the pandemic era began, economists have sounded the recession alarm no fewer than three times: first when gross domestic product (GDP) shrank in early 2022, again during the Silicon Valley Bank crisis of 2023, and most recently when the Sahm Rule was triggered during the summer of 2024. Yet America’s economic engine keeps chugging along, leaving analysts scrambling to explain why the doom forecasts keep missing their mark.

The stock market’s reaction to President Trump’s tariff announcement followed this now-familiar pattern of panic and resilience. Initial headlines sparked a sell-off that briefly dragged the S&P 500 stock price index below 5,000 for the first time in months. But within weeks, the index came roaring back, erasing its year-to-date losses and flirting with bull market territory. This whipsaw action revealed an important truth: Investors are increasingly betting that the economy can absorb policy shocks that would have crippled previous expansions.

This underlying economic resilience, even in the face of apparent warning flags, highlights the importance of looking beyond superficial data. The solution may lie in what analysts call “core GDP,” which measures the final sales to private domestic purchasers. Where the headline GDP figure mixes volatile government spending and trade data with underlying demand, this refined metric instead focuses solely on how much US households and businesses are actually buying. This distinction proved critical in understanding the first quarter’s apparent contraction, which upon closer examination revealed more about temporary distortions than fundamental weakness.

In the first quarter, a surge in imports caused by companies racing to beat the coming tariffs artificially depressed the GDP numbers, while simultaneous government spending cuts further skewed the picture. Meanwhile, the core GDP figure told a different story about the real economy. Consumer spending slowed and rotated from discretionary goods to consumer staples and services, but it didn’t contract. Most tellingly, business investment accelerated, particularly in technology sectors because of what appears to be an influx of AI-related capital expenditures.

This wave of AI investment has helped blunt the impact of tariff uncertainty in early 2025. Despite the positive momentum, a caveat remains. The economy’s and market’s reliance on technology investment seen in the first quarter may not be sustainable if trade restrictions lead to critical shortages. AI development, in particular, is vulnerable to the availability of essential mineral resources, such as rare earths, which could limit its expansion. Therefore, we believe the economy and market can continue to defy skeptics, provided trade relations are meticulously managed.

Looking ahead, we suspect that as long as the Trump administration continues to facilitate the expansion of AI firms, it will remain a positive driver of growth. For the broader economy, any indications that a trade war will not result in painful outcomes — such as elevated inflation and unemployment — should encourage increased consumer and business spending. We continue to believe that stocks and other risk assets can continue to recover, with prospects especially positive for quality assets. This assessment reflects both the prevailing uncertainty with a dash of hope for improvement after the July 9 tariff deadline.

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Business Cycle Report (May 29, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

In April, the US economy continued to grow broadly with no immediate signs of contraction. The composite economic index remained just above the recession threshold and showed minimal change from the previous month’s reading. While employment indicators continued to demonstrate resilience, other sectors presented a more nuanced picture. Financial markets and real economic data sent mixed signals, suggesting an economy at a crossroads between sustained growth and potential softening. This dichotomy between strong labor markets and weaker production indicators bears close monitoring in coming months.

Labor Market

The labor market showed gradual easing from its recent peaks while remaining tight by historical standards. Initial jobless claims and employer payrolls pointed to ongoing strength in the demand for labor. In contrast, the two-year change in the unemployment rate signaled potential weakness. This divergence suggests that while hiring may be cooling from its torrid post-pandemic pace, underlying demand for workers remains robust. The continued labor market tightness provides an important buffer against broader economic weakness, supporting consumer spending and overall growth.

Financial Markets

Financial markets delivered conflicting messages about economic prospects. Equity markets rallied on optimism that potential trade restrictions might be less severe than initially anticipated, reflecting confidence in corporate earnings. However, bond markets told a more cautious story, with Treasury yields ending the month slightly lower as investors priced in greater economic uncertainty. This disconnect between equity and fixed income markets typically signals investor debate about future growth trajectories, with bond markets often proving more prescient about economic turning points.

Goods Production and Sentiment

The goods-producing sector emerged as the economy’s weakest link in April, with three of four key diffusion indicators in contraction territory. Consumer sentiment remained depressed, potentially foreshadowing softer spending ahead. Business investment showed particular weakness, evidenced by sluggish housing starts and declining capital expenditures. These trends suggest corporate leaders are growing more cautious about future demand. However, supplier delivery times — often an early indicator of economic activity — remained elevated, pointing to persistent underlying demand that could support continued expansion.

Outlook and Risks

While recession risks persist, current data suggests the economy will likely avoid contraction in the near term. The primary uncertainties center on potential trade policy impacts and whether labor market strength can offset softness elsewhere. There are signs of growing margin pressures that could eventually affect hiring and investment decisions. Our baseline projection anticipates continued modest growth through the third quarter, though the economy appears increasingly vulnerable to external shocks. Investors should remain vigilant for signs of broader economic deterioration, while increasing risk exposure may be warranted as the economic outlook becomes clearer.

The Confluence Diffusion Index for May, which encompasses data for April, remained slightly above the recovery indicator. However, the report showed that five out of 11 benchmarks are in contraction territory. Using April data, the diffusion index was unchanged at -0.0909 and above the recovery signal of -0.1000.

  • Equity prices bounced back following trade progress.
  • Manufacturing data offered mixed signals.
  • Hiring picked up in a sign that labor conditions remain tight.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

Business Cycle Report (May 1, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index for April, which encompasses data through March, remained slightly above the recovery indicator. However, the report showed that five out of 11 benchmarks are in contraction territory. Using March data, the diffusion index was unchanged at -0.0909 and above the recovery signal of -0.1000.

  • Equity prices have seen a sharp decline in momentum.
  • Construction activity shows marked deceleration.
  • Labor market conditions are easing slightly but remain historically tight.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

Asset Allocation Bi-Weekly – Managing an Economic Slowdown (March 31, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

Six months into his presidency, Reagan backed restrictive monetary policy to combat inflation. While the move initially drew criticism for its short-term economic pain, many viewed it as a necessary step toward long-term stability and growth. This optimism was ultimately vindicated, paving the way for Reagan’s landslide reelection in 1984. The lesson: an early-term recession, though difficult, can create strategic opportunities to push a bold and transformative agenda forward.

A president typically wields the greatest amount of political capital at the outset of their tenure. This period, often referred to as the “honeymoon phase,” is usually marked by peak public approval, fueled by the optimism and goodwill that was generated during the election campaign (see chart below). Supporters are often energized, and even those who may not have voted for the president often extend a measure of deference and give the new administration an opportunity to set the tone and pursue its agenda.

During this pivotal period, President Trump has escalated his aggressive trade war with the rest of the world. It appears that the administration’s strategy is to weather any associated short-term economic challenges — such as heightened market volatility caused by unpredictable trade policies and budget cuts designed to strengthen the government’s fiscal position — in order to achieve a broader goal of transforming the US economy from one driven by high consumption to one that prioritizes export promotion.

The administration’s ability to manage an economic downturn will be largely influenced by the capacity to lower long-term rates, especially in today’s high interest rate environment, as well as the fiscal flexibility created by recent efforts to curb government spending. Extending the 2017 corporate tax cuts could also provide businesses with a financial buffer, enabling them to adapt to the impact of new tariffs.

Importantly, the Trump administration is apparently counting on the Federal Reserve to serve as an economic safety net in the event of a severe downturn. While the central bank has already reduced rates by 100 basis points from their peak during the tightening cycle, it still has the ability to cut rates and restart balance sheet expansion, if needed. These measures could enable households to refinance their mortgages at lower rates, thereby improving household balance sheets and paving the way for higher spending.

That said, this strategy carries significant risks. For example, if the downturn persists for too long, it could potentially trigger a financial crisis, undermining household confidence and consumers’ willingness to spend. In such a scenario, the government might be forced to take more drastic measures, such as implementing a bailout or fiscal stimulus to restore confidence and stabilize the economy. Such spending could lead to a sharp increase in government debt, raising concerns about its long-term sustainability and potentially leading to a period of stagnating growth.

While there is no reward without risk, the president’s ability to slow the economy to implement longer-term, sustainable reforms also hinges on his capacity to embrace short-term political pain in exchange for long-term gain. For example, we note that while the Reagan recession was relatively short, it resulted in Republicans losing House seats to the Democrats. This scenario could present considerable challenges for the Trump administration. Unlike President Reagan, who successfully advanced his agenda by working across the aisle, Trump may find himself constrained by a lack of bipartisan cooperation given the current political climate. As a result, he may be more incentivized to ensure that Republicans regain and possibly add to their majority in Congress, something Reagan was not able to do in the mid-term elections during his first term.

In such a scenario, the president would need to pivot strategically, prioritizing the delivery of a tangible and widely recognized victory to the public ahead of next year’s primary election to sustain momentum and galvanize support. This could take the form of highlighting major achievements, such as breakthroughs in trade negotiations or the successful passage of the long-awaited tax bill.

We continue to believe that equities will be able to produce attractive long-term investment returns, especially if the Trump administration achieves its long-term goals. However, given the current level of uncertainty and the risk of near-term economic disruptions, we also see gold as an attractive option. Additionally, the potential for a decline in long-term interest rates could make this an opportune time to extend duration in government fixed-income securities.

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Business Cycle Report (March 27, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index remained above the recovery indicator for the sixth consecutive month. However, the February report showed that four out of 11 benchmarks remain in contraction territory. For February, the diffusion index improved from a revised -0.1515 to -0.0909 and is above the recovery signal of -0.1000.

  • Interest rates fell due to concerns about the economy.
  • Manufacturing activity improved slightly.
  • Labor market conditions are starting to loosen.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

Business Cycle Report (February 27, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index remained above the recovery indicator for the fifth consecutive month. However, the January report showed that five out of 11 benchmarks remain in contraction territory. For January, the diffusion index improved from -0.0909 to -0.0273 and is above the recovery signal of -0.1000.

  • Interest rates rose due to renewed inflation fears.
  • Manufacturing activity was relatively mixed.
  • Labor market conditions showed signs of improvement.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report