US Watch – Pathways to a recession

The yield curve inversion – driven by the trade war escalation – has reignited recession fears. The yield curve has a strong predictive track record, and is likely signalling the heightened, late cycle vulnerability to a recession. However, recessions are typically caused by a combination of capacity constraints, and a financial market or policy shock. While the US economy is approaching full capacity, it is not quite there yet. Productivity is dampening cost pressures. We identify key potential sources of shocks in the coming years. In the absence of risks crystalising, and with the Fed easing policy, the expansion likely has further to run – albeit at a slower pace.