U.S. Recession Risk Monitor U.S. Recession Risk Monitor January 19
BBVA Research - U.S. Recession Risk Monitor January 19 / 2 Highlights The probability of a recession steadies after sharp rise at the end of 18 Financial markets adjusts to dovish monetary policy shift and stable growth outlook Fiscal policy risk increasing with divided White House and Congress Pressures on corporate spreads ease, as perception of near-term downside risks decline Economic fundamentals for households and financial institutions remain solid Uptick in global financial market stress
Global Prices Real Estate Business Households Financial BBVA Research - U.S. Recession Risk Monitor January 19 / 3 Heat Map Current Upside 7 Crisis Downside Risk Credit Leverage Nonfinancial Leverage S&P5 CAPE Treasury Slope HY Bonds/Total Bonds HY Spread Noncore Deposits/Assets Loans/Deposits Consumer Confidence Real YD Real PCE Labor Market Index Interest Payments/YD Consumer Credit/YD ISM Manufacturing ISM Nonmanufacturing Small Business Optimism IPI Capacity Utilization Business Sales New Orders C&I Loans Debt/Sales Home Sales Affordability HPI Residential Construction Nonresidential Construction Residential Loans CRE Loans Inflation Pressures Deflation Pressures Core CPI TIPS 5Yr Forward Import/Exports Prices Global Equities ex U.S. Gold Prices Real Oil Prices Dec-18 Nov-18 Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17 Feb-8 Jan-8 Dec-7 Nov-7 Oct-7 Sep-7 Aug-7 Jul-7 Jun-7 May-7 Foreign Securities Purchases Global Activity Index Composite
BBVA Research - U.S. Recession Risk Monitor January 19 / 4 BBVA U.S. Recession Probability Treasury Spread Term-Premium Adjusted %, 12m-ahead.8.6.4.2 83 86 89 92 95 98 1 4 7 13 16 19 Risk Factors Percentile Rank 9 8 7 6 5 4 3 Wages Shadow Banking Slope Tipping Point Personal Int Expense CAPE Recession Probability Factor %, 12-months & 24-months ahead 8 6 4 Regional Conditions # of States with greater than 5% probability 5 4 3 83 86 89 92 95 98 1 4 7 13 16 19 12-months ahead 24-months ahead 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 Source: BBVA Research
BBVA Research - U.S. Recession Risk Monitor January 19 / 5 Recession Probability Treasury Spread Model %, 12-months ahead 8 6 4 Credit Spread Model %, 12-months ahead 91 93 95 97 99 1 3 5 7 9 11 13 15 17 19 8 6 4 Dynamic-Factor Markov-Switching Model %, 12-months ahead 8 6 4 Survey of Professional Forecasters %, Decline in real GDP next quarter 91 93 95 97 99 1 3 5 7 9 11 13 15 17 19 8 6 4 91 93 95 97 99 1 3 5 7 9 11 13 15 17 19 Source: BBVA Research, Federal Reserve Board, FRBNY, FRBSL, FRBP and Haver 91 93 95 97 99 1 3 5 7 9 11 13 15 17 19
BBVA Research - U.S. Recession Risk Monitor January 19 / 6 Credit Cycle and Recession Timing Indexes Risk of systemic crisis remains low. No imminent risk of recession BBVA Credit Cycle Risk Index Above = above average risk.8.6.4.2 -.2 -.4 -.6 -.8-82 85 88 91 94 97 3 6 9 12 15 18 BBVA Recession Timing Index Above = longer lag to recession 1.5.5 -.5 - -1.5-2. 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Source: BBVA Research and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 7 Scenarios A painfully slow U-shape recovery is more likely under less effective monetary and fiscal response Recession Severity Real GDP Growth; t= Year of Recession 2.5 Outcome Probability 19-21 t t+1 2. 1.5.5 No recession 6% 2.1 (Baseline avg. 19-21) -.5 - Recession 4% -.7 1.8-1.5-2. -3-2 -1 1 2 3 Potential Recession Systemic Crisis Systemic crisis 4% -1.7 -.6 Source: BBVA Research
Less Likelihood More BBVA Research - U.S. Recession Risk Monitor January 19 / 8 Risk Matrix Equity Price Correction CRE Downturn Residential Slowdown Global Macro* TOT Adjustment Oil Shock Business Leverage Cycle Shadow Banking Fiscal Crisis Consumer Credit Cycle Inflation Shock Current USMCA Failure Extreme Events** Liquidity Shock Institutional Collapse Small Severity Large Source: BBVA Research; This assessment is not static and can change significantly depending on future developments * Includes macroeconomic conditions in China, Euro Area, Brexit, Emerging Markets ** Includes non-economic factors: Climate, Cybersecurity, Pandemic, Terrorism, Migration, etc.
BBVA Research - U.S. Recession Risk Monitor January 19 / 9 Financial Markets Financial Stress Indicators > = tighter than average 4 2-2 -4 Credit Equities Safe assets Last (+/- 2sd) Funding Volatility Risk Nonfin Leverage Treasury Yield Curve 5Y Minus 2Y Basis points 2. Financial Stress Index Above = above average stress 8 6 4 2-2 93 94 96 97 98 1 3 4 6 7 8 11 13 14 15 17 18 Corporate Spreads Basis points 45 4 1.5.5 -.5 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 35 25 15 5 7 8 11 13 14 16 17 19 BBB CCC (rhs) 3 Source: BBVA Research, OFR, KC Fed, R. Shiller, ICE and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / Households Liabilities/Disposable Income Ratio 1.5 1.3 1.1.9.7.5 7 74 78 82 86 9 94 98 2 6 14 18 Nonfarm Payroll YoY % Change 6 Interest Payments/Personal Income % 2.7 2.5 2.3 2.1 1.9 1.7 1.5 7 74 78 82 86 9 94 98 2 6 14 18 Delinquency Rate % 15 5.5 4 2-2 5 4.5 3.5 2.5-4 -6 7 74 78 82 86 9 94 98 2 6 14 18 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Residential Consumer (rhs) 1.5 Source: BBVA Research, Federal Reserve, BLS, BEA and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 11 Businesses Nonfinancial Corporate Profits % of GDP 7 6 5 4 3 2 1 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Nonfinancial Corporate Short-term Liabilities YoY % Change - - 82 84 86 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Nonfinancial Business Debt % of GDP 5 4 3 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Corporate NonCorporate C&I Loan Charge-Off Rate & Fed Funds % 3. 2.5 2. 1.5.5 88 9 92 94 96 98 2 4 6 8 12 14 16 18 C&I Fed funds (rhs) 8 6 4 2 Source: BBVA Research, Federal Reserve, BEA and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 12 Real Estate Housing Starts and New Home Sales Thousand units, annualized 25 15 5 BBVA Real Estate Prices Misalignment 199= 16 145 13 115 85 7 74 78 82 86 9 94 98 2 6 14 18 Starts Sales 74 78 82 86 9 94 98 2 6 14 18 Residential Commercial Housing Affordability and Prices Index and YoY % Change - - Nonresidential Construction YoY % Change 3 - - 74 78 82 86 9 94 98 2 6 14 18 HPI Affordability (rhs) 25 15 5 Source: BBVA Research, Federal Reserve, Census, BEA and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 13 Financial Sector Deposits and Capital Ratios % of loans and assets, commercial banks 1 1 9 8 7 Noncurrent Loans and Funding % of loans and liabilities,, commercial banks 6. 5. 4. 3. 2. 94 96 98 2 4 6 8 12 14 16 18 Core Deposits/Loans Tier 1 Capital (rhs) 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Noncurrent Noncore funding (rhs) Source: BBVA Research, FDIC, Federal Reserve and Haver 14 13 12 11 9 24 16 12 8 Loan Reserves % of total loans, all FDIC institutions 4. 3.5 3. 2.5 2. 1.5 86 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Securitizations US$tn 6. 5. 4. 3. 2. 4 5 6 7 8 9 11 12 13 14 15 16 17 18 Commercial Residential Automobile Credit Card Other Student Loans CDO/CLO Excludes Agency MBS and CMO
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 BBVA Research - U.S. Recession Risk Monitor January 19 / 14 Prices Labor Costs YoY % Change, ECI 8 6 4 2 84 86 88 9 92 94 96 98 2 4 6 8 12 14 16 18 Wages Benefits Market Inflation Expectations % 3. 2.5 2. 1.5.5 Nonlabor Costs per Unit of Real GDP YoY % Change 8 6 4 2-2 -4 84 86 88 9 92 94 96 98 2 4 6 8 12 14 16 18 BBVA Inflation Regime Probability Regime change low to high.8.6.4.2 Forward Breakeven 7 73 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Source: BBVA Research, Bloomberg, BLS, BEA and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 15 Global Conditions Advanced Economies Financial Stress =Average Stress Level -4. -2. 2. 4. 6. 8. 1 12. 14. 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 Net Foreign Purchases of U.S. Securities US$bn, 3mma, excluding OFIs and Int l organizations 1 8 6 4 - -4 989934567891112131415161718 Emerging Markets Financial Stress =Average Stress Level 2.5 2. 1.5.5 -.5 - -1.5 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 Global Activity Leading Indicator YoY % Change 8 6 4 2-2 -4 76 79 82 85 88 91 94 97 3 6 9 12 15 18 Source: BBVA Research, Treasury, OECD and Haver
BBVA Research - U.S. Recession Risk Monitor January 19 / 16 For more information Recent economic briefs and presentations: All things come to an end, but is the U.S. headed for recession? Corporate debt in the twilight of the credit cycle Just what the doctor ordered: real-time recession forecasts Recession risk monitor 4Q18 Recession risk monitor December 18
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