U.S. Recession Model at 100% Confirms Downturn Is Already Here

The novel coronavirus has spurred what will likely be the worst recession in generations as the U.S. economy grinds to a halt and millions lose their jobs.

100%
Chance of Recession Within 12 Months

Bloomberg Economics created a model last year to determine America’s recession odds. The chance of a recession now stands at 100%, confirming an end to the nation’s longest-running expansion.

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While much of the economic data that feed into the model continues to lag, filings for unemployment benefits — which are reported with less than a week’s delay — saw an unprecedented increase at the end of March. About 10 million jobless claims were filed in the last two weeks of the month, underscoring a sharp deterioration in the once-vibrant labor market.

Recession is Here

Probability of U.S. recession within 12 months

Source: Bloomberg Economics

The recession probability model developed by Bloomberg economists Eliza Winger, Yelena Shulyatyeva, Andrew Husby and Carl Riccadonna incorporates a range of data spanning economic conditions, financial markets and gauges of underlying stress.

The surge in the recession probability mainly reflects the shocking jobless claims figures, but plummeting stock prices for much of the month also played a role. The model's reading on the odds for February came in at 33%. At the time of the prior report, Bloomberg Economics took account of early financial market data for March, putting the odds at 53%.

Unemployment Soars, Stocks Plummet

Selected key indicators from recession probability model

Note: An Employment Diffusion Index lower than 50 means more industries are reducing employment than increasing employment

Sources: Labor Department, Bloomberg Economics

America looks starkly different from just a month ago. More than 11,000 in the country have died from Covid-19, while the number of infected was approaching 400,000 on Tuesday, the highest reported total worldwide. Social gatherings have been curbed and a majority of Americans have been directed to stay home. Restaurants, hotels, factories and a variety of other businesses have closed their doors.

The sudden stop in activity has many forecasters predicting the economy will experience its largest-ever contraction in the second quarter, and some analysts project about 20 million people will have lost their jobs by July.

Americans are increasingly pessimistic about the outlook, with one measure of consumer sentiment plunging last month by the most since October 2008. The March jobs report showed employers cut a net 701,000 jobs in the month, the most since the Great Recession — and a number that reflected just the first half of the month.

Normally, an increase in weekly filings for unemployment benefits is one of the indicators economists look to first for signs the U.S. is on the cusp of a recession. This time, they surged at such a rapid pace that they offered little advance notice that the economy was hurtling toward and into a downturn.

The Federal Reserve has taken dramatic steps to soften the economic hit. The central bank lowered the benchmark interest rate to near zero last month and has said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep markets functioning and borrowing costs low.

The government has also taken swift action. President Donald Trump last month signed the largest relief package in U.S. history, which provides approximately $2 trillion in support. The law includes direct payments for many Americans and financial help for small businesses, though it’s unclear if the aid will arrive fast enough for some.

Zero-Bound

Federal Reserve interest rate cuts in prior downturns

*Assumes minimum target range for the federal funds rate of 0-0.25%. Years denote start of easing cycles

Source: Bloomberg Economics

Many define a recession as two consecutive quarters of negative growth. The official dating committee at the National Bureau of Economic Research takes a more holistic approach, defining a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months.”

The panel usually takes about six to 12 months to make the call, though, so the existence of a recession could be widely accepted before it’s official. As the chart below shows, not all recessions are created equal. The 2007-2009 downturn was especially protracted and deep because it coincided with a financial crisis. Other recessions have been shorter and shallower.

Shallow or Deep?

Quarterly change in U.S. GDP following recession; 100 = start of recession

Sources: BEA, Bloomberg Economics

Recessions are usually accompanied by a swift increase in the unemployment rate. The jobless rate differs greatly between downturns depending on the breadth and severity of the recession. While unemployment peaked at 10% in 2009, and rose even higher in the early 1980s, other downturns have brought still-painful but smaller increases in the jobless rate. Many economists predict the unemployment rate will jump into the mid-teens or higher in the coming months, as millions of Americans join the ranks of the unemployed.

Out of Work

Quarterly change in U.S. unemployment rate in past recessions

Sources: BLS, Bloomberg Economics

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