We think a US recession is needed to restore price stability, and that the tightening in financial conditions over the last year is sufficient to deliver a downturn in the near future. Our new data tracker allows us to monitor if a recession is coming, and if not whether one will eventually be needed to bring inflation under control.
- We think that Fed tightening will drive the economy into recession in Q2 (or a little later). This downturn is necessary to bring inflation back to target.
- The market looks more optimistic, with pricing putting a lot of weight on the possibility of a soft landing. This modest slowing in growth is then seemingly sufficient to tackle inflation, setting the stage for Fed easing later this year.
- We have developed a data tracker to tell us which of these stories is playing out, focussing on a range of leading demand indicators, and measures of how the supply side is shaping up.
- This tracker should help signal if our call is unfolding in a timely manner, which would force the market to price a more challenging macro outlook.
- It will also identify if the economy is shifting in a different direction. There is a growing risk that financial conditions need to tighten further to bring inflation under control.