The Trust Layer for Market Analysts

The analysis commences with an examination of the US Federal Reserve Recession Model, designed to forecast recession probability over a 12-month period. Historically, spikes in this model, indicating tighter liquidity, reliably preceded economic downturns. However, a present anomaly is observed: despite the model signaling high recession probabilities in 2023-2024, an official recession did not occur, and the model is now declining, typically denoting economic stabilization. This contradicts recent economic indicators such as a near four-year high in the US unemployment rate, the first negative ADP employment change since the pandemic, and the lowest nonfarm payroll additions post-pandemic. Federal Reserve Chair Jerome Powell has also voiced concerns about the deceleration in job creation. The analysis highlights a consistent historical pattern: liquidity tightening, as per the Fed's model, precedes increases in the unemployment rate, correlating with recessions. A 12-month forward shift of the recession probability model aligns its peaks with those in the unemployment rate, suggesting the unemployment rate is currently peaking, implying a temporary economic reprieve. Nevertheless, the shifted model's probability remains at 30%, which is considerably higher than post-recessionary lows, indicating that liquidity, though eased, is not genuinely loose. Furthermore, bank lending standards data from a Federal Reserve survey shows continued tightening, which typically forecasts job market deterioration. This suggests a sustained challenging economic climate rather than a period of prosperity. Despite these macroeconomic concerns, the current price action for the S&P 500 index indicates potential for further upside in the upcoming months, even if short-term volatility is anticipated.