The odds of a recession have risen to 60% over the summer amid the economic slowdown

  • According to UBS, the likelihood of a recession hitting the economy within the next year rose to 60% over the summer.
  • The probability of a recession was 40% ahead of July macro data and recent rate moves.
  • “The July hard data factor confirms that we are in a contraction phase [with] 94% probability,” UBS said.

The economy has a higher chance of slipping into recession within the next 12 months, UBS said in a note to clients Tuesday.

The Swiss investment bank said the probability of a US economic recession has risen to 60% considering the latest economic data. That’s a 20 percentage point jump from June’s recession odds of just 40%.

UBS tracks an average of three recession indicators to monitor the likelihood of an impending economic slowdown. These three factors include hard macro data, the US Treasury yield curve and credit data.

“The July hard data factor confirms that we are in a contraction phase [with] 94% probability,” UBS said, adding that it sees the economy as late in the cycle, which is weak but has not yet collapsed.

“As we’ve argued before, not all (severe) slowdowns historically lead to a recession…the US team’s model forecast is that the contraction will not turn into a full-blown recession,” UBS said.

But the continued rise in US Treasury rates, further inverting the yield curve, has signaled a higher likelihood of an imminent recession.

“Our measure of recession from interest rates depends on the overall slope of the yield curve…much of the curve is now sloping down, as is typically the case before a recession,” UBS said.

But while interest rates and hard macro data are pointing to an impending recession, the credit data monitored by UBS is not.

“The recession signal from credit — 15% in July — is still harmless,” UBS said. The bank is investigating bad loans and a survey of senior loan officers, and so far none are showing signs of distress.

Robust corporate earnings may explain why credit data is yet to show worrying signs of an impending recession, the bank said, highlighting the fact that the economy is sending mixed signals that are making it difficult for both the Federal Reserve and investors to navigate.

For example, while the Fed’s main concern is inflation, there are increasing signs that rising prices are “falling like a stone” and leading to outright deflation. That’s according to Fundstrat, and if it works, it could help contain interest rates and give the economy a soft landing, as well as help propel the S&P 500 to a new high by the end of the year.

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