Snippets from a Bank of America / Merrill Lynch client note on their US outlook
We now have a number of early indicators starting to signal heightened risk of recession. Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance.
Our baseline is that this is simply the third mini-cycle in this expansion and that the economy will return to above-trend growth at the end of next year after a soft patch
However, we are worried that the economy will not be as lucky this time around for a few reasons:
- later stages in the cycle - the economy has returned to full capacity and we no longer have "easy growth";
- monetary policy tools are limited;
- there is a persistent external shock hitting the global
economy - the trade war - creating high uncertainty across the global
economy.
As we have consistently noted, expansions do not die of old age, but they can die from a policy mistake. And we are ripe for a policy mistake today.
