There are growing signs the US economy is about to enter a full-blown recession, said Bank of America.
The bank cited worrying signs in manufacturing and the jobs market, and said investors aren't paying attention to the risks.
"Investors too optimistic on rate cuts and not pessimistic enough on recession," BofA said.
Fears of an imminent recession have reached a fever pitch this year, with everyone from Wall Street market strategists to company CEOs warnings of a slowdown in the US economy.
But so far, no recession has materialized as the jobs market and consumer spending have remained fairly resilient.
But according to Bank of America, there are plenty of signals that suggest a recession has not been avoided. These are the 12 charts that indicate the US is on the verge of entering a full-blown recession, according to Bank of America's Michael Hartnett.
1. A decline in manufacturing activity
"March ISM was 46.3, lowest since May 2020. In past 70 years whenever manufacturing ISM dropped below 45, recession occurred on 11 out of 12 occasions (exception was 1967)," BofA said.
2. A decline in manufacturing often coincides with lower earnings
"New orders component of manufacturing ISM at 44.3. New orders < 45 have coincided with EPS recessions (see 1991, 2001, 2008, 2020)," BofA said.
3. Global earnings model suggests imminent decline
"BofA Global EPS Growth Model currently predicts EPS to fall -16% year-over-year by August. Model is driven by Asian exports, global PMIs, China financial conditions, US yield curve," BofA said.
4. Steepening yield curve often precedes a recession
"US Treasury 2-year/10-year yield curve flattens and inverts in anticipation of recession. Yield curves steepen immediately as recessions begin. US Treasury 2-year/10-year yield curve has steepened from -110 basis points to -50 basis points in past 4 weeks," BofA said.
5. Price of oil showing concerns of a recession
"Oil prices historically rise into recessions and decline during recessions. Latest OPEC+ output cuts underscore recession concerns, with limited upward pricing pressures from China reopening so far," BofA said.
6. The jobs market often follows manufacturing activity
"Weak ISM manufacturing PMI suggests US labor market will weaken next few months," BofA said, adding that it viewed the February and March jobs report as "the last strong payroll reports of 2023."
7. Global home prices are falling
"Global house prices turning negative as higher rates hit real estate in US, UK, Canada, Sweden, Australia, and New Zealand," BofA said.
8. A credit crunch will hurt the jobs market
"US banks have been tightening lending standards to small companies past few quarters. Credit crunch to intensify and highly correlated with small business demand for workers. Should May SLOOS report show drop in loan availability to -10 or below = unambiguous credit crunch," BofA said.
9. A decline in European bank lending
"Bank lending in Eurozone down three months in a row (very rare outside Great Financial Crisis, Euro debt crisis, COVID). $14 trillion Eurozone economy highly dependent on bank credit," BofA said.
10. Weak jobs market leads to big interest rate cuts
"Falling US job openings = weaker labor market = lower Fed funds rate. Yield curve likely to steepen very dramatically next six to 12 months as Fed cuts ahead of election but long-end downside inhibited by inflation and fiscal shenanigans," BofA said.
11. Stocks dropped after last Fed rate hike in inflationary periods
"Our view: Sell the last rate hike. Investors too optimistic on rate cuts and not pessimistic enough on recession. 'Sell the last hike' was correct strategy for stocks in inflationary '70s/'80s, 'buy the last hike' worked in the '90s disinflationary market," BofA said.
12. Stocks and recessions don't mix well
"Recessions reliably negative for equities throughout history and insufficiently discounted in advance. Plenty of room for more S&P 500 downside," BofA said.
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