Is US Recession Risk As High As It Seems?

Key Chart –> Washout SELLing in Global Markets This Week

FIG A: Longview Colvin model¹ (global over-extendedness indicator) vs. S&P500

Extract from Tuesday’s Tactical Alert

“…Having moved NEUTRAL equities in early February, we recommend starting to re-BUILD OW positions in our tactical portfolio.

In particular, after a large drawdown (21% in the S&P500), US equities appear to have made a major low yesterday. A relief rally is now likely. The rationale for that is five-fold. In particular….”

Source: Longview 'Tactical' Alert: “Start Re-BUILDing OW in Tactical Portfolio”, 8^th April 2025

The US Recession Debate

Despite the rolling back of tariff threats, and the instigation of a 90 day pause for most countries (i.e. all except for China), the recession debate continues to rage. Cited drivers of that recession include: i) the parallels with the COVID supply chain shutdowns; ii) the inability of the Fed to cut rates because of the inflationary impact of tariffs; coupled with iii) CEO/CFO hesitancy to spend as a result of the policy uncertainty. All of these (and more, like the negative wealth effect of falling stocks) are being cited as reasons that a recession is likely (or, in the case of Goldmans, now running at a 45% probability, down from 60% earlier in the week).

Whilst we don’t disagree with the dysfunctionality of the tariffs policy (especially the higher proposed rates), there are three groups of reasons why the US economy will likely skirt recession (with the economy suffering only a soft patch and mid-cycle slowdown).

Those three are as follows:

Group 1: Five Key Reasons for a Mid-Cycle Slowdown not a Recession

Structurally the US economy is in relatively good condition. The private sector, in particular, has cleaned up its act in the past 10 – 15 years. Household leverage ratios are back to where they were at the turn of the millennium; household and corporate debt service ratios are also very low; while companies have high margins and are throwing off high levels of cashflow. The US government sector has, clearly, overextended itself. The private part of the economy, though, is structurally strong.

That is a positive backdrop for absorbing shocks.

Indeed that factor (corporate sector strength) is one of the five key reasons we expect the US economy to avoid a recession. The full list is shown below – for the detailed explanation see our latest Quarterly US macro analysis, 19^th March 2025: “US: Mid-Cycle Slowdown NOT Recession”.

Naturally, CEO confidence will have fallen in recent weeks. The Q1 (Conference Board) confidence data point, though, was the highest since the COVID boom (and a continuation of an uptrend of the past two years).

Group 2: Drivers of Prior US Recessions –> Not Present