Political uncertainty for the US is on the rise, but economic risk remains low. The turmoil surrounding President Donald Trump raises questions about the viability of his administration’s pro-growth policy agenda. Nonetheless, it’s debatable if the economy is vulnerable due to elevated political risk, in part because there’s no sign of macro stress based on the numbers published to date.
Economic momentum for the US remains strong as the expansion nears the eight-year mark. The last recession ended in June 2009, according to the National Bureau of Economic Analysis, and the probability is low that a new downturn will start in the foreseeable future. But there may be an economic price to pay for the political chaos in Washington.
The Economic Policy Uncertainty Index for the US has recently spiked, highlighting the potential for blowback. The index’s creators – a trio of economists – advised in a 2016 paper that a higher reading of “policy uncertainty foreshadow declines in investment, output, and employment in the United States.” That doesn’t mean that recession risk will surge, but there is a connection in some degree between political uncertainty and economic activity.
Meantime, the probability is virtually nil that an NBER-defined recession has started, based on numbers published to date via the Capital Spectator’s proprietary business-cycle indexes. The nearly complete profile for April shows that just two of 14 indicators in our model are negative. As such, the economy’s forward momentum looks set to roll on for the near term. (For a more comprehensive read on business-cycle analysis on a weekly basis, see The US Business Cycle Risk Report.)
Aggregating the data in the table above continues to show that the broad trend remains positive. The Economic Trend and Momentum indices (ETI and EMI, respectively) continue to print at a moderately elevated levels, holding on to gains that unfolded in previous months. As a result, both benchmarks remain well above their respective danger zones: 50% for ETI and 0% for EMI. When/if the indexes fall below those tipping points, we’ll have clear warning signs that recession risk is at a critical level, in which case a new downturn is likely. The analysis is based on a methodology outlined in my book on monitoring the business cycle.
