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Recession risks remain muted as fear tracks higher: Report

Odds of a recession are edging higher, but are still holding below the thresholds crossed prior to the last seven recessions, according to a new analysis Thursday by Oxford Economics.

The firm places its all-in odds of a recession at 25% for 2019 and 40% for 2020, said Gregory Daco, chief U.S. economist Oxford Economics. The firm’s published probability for 2019 is in-line with estimates BNP Paribas put out earlier this month, as well as the Federal Reserve Bank of New York’s yield curve model. While these odds are the highest since 2008, they remain below the 30% threshold crossed in the last seven recessions, Daco said.

Against a backdrop of still-solid economic fundamentals and a more dovish Federal Reserve, one of the key downside risks to the economy is, in fact, fear of a slowdown, Daco said. He cautioned against “recession bias,” or the generally self-fulling nature of households and businesses tightening their belts and spending more cautiously in anticipation of a perceived slowdown. This, in turn, contributes to the economic sluggishness that market participants had been trying to avoid in the first place.

“Despite an economy growing around 3%, unemployment at a half-century low, and inflation stable around 2%, we caution against the dangerous recession bias,” Daco said. “While we acknowledge the U.S. economy has reached an inflection point and growth momentum will slow from 3% to 2% this year, we believe solid fundamentals, elevated private sector confidence and lingering fiscal stimulus will prevent a hard landing.”

Some other gauges of recession risk Oxford Economic tracks pointed to higher odds, however. Oxford Economics’ activity-augmented yield curve model showed recession odds of about 45%, based on data including the Chicago Fed National Activity Index, the real Federal Funds rate and the yield curve. However, the measure “remains well below the 50% threshold associated with each of the last seven recessions,” Daco noted.

Oxford Economics’ proprietary Calibrated Recession Index, which the firm said has accurately predicted the last seven recessions when the reading crossed a threshold of 90%, showed just a 1% chance of recession in the next three months.

Despite the broadly muted expectations for a recession, fears of a recession are, as Daco warned, on the rise. A Good Trends analysis shows searches for “recession” have been tracking higher since receding from their December highs.

And some firms have begun operating as though a recession has already begun, according to a study released Thursday from Gartner analyzing earnings transcripts from S&P 500 companies. Discussions about capital and cost-efficiency programs became increasingly common further into 2018, said Tim Raiswell, vice president at Gartner’s finance practice. Marquee companies including Ford, Pepsi and Proctor & Gamble had each announced major efficiency programs in their 2018 reports.

However, this also coincided with a sharp downturn in equity markets in the fourth quarter of 2018, which impacted both business as well as consumer confidence.

“Mentions of the words ‘downturn’ and ‘slowdown’ were four times more likely to appear in earnings calls in 4Q18,” Raiswell said in a statement. “Yet it’s important to consider that 4Q18 brought relatively extreme drops in stock prices. After 10 years of economic expansion, it’s not surprising to see analysts asking company executives about their preparations for cyclical economic weakness.”

For the time being, most economists and market pundits see recession risks remaining low for at least the next 12 months.

“Right now the conditions that historically have signaled a potential recession are not in place,” Brad McMillan, chief investment officer for Commonwealth Financial Network, wrote in a note Wednesday. “There are signs of weakness, with consumer confidence going to yellow. But on an absolute basis, all the major signals are solid—with strong job growth, healthy levels of consumer confidence, and expansionary business confidence. As such, economic factors remain at a green light.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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