JP Morgan’s Proprietary Models Say the Probability of Recession ‘Have Never Been Higher’

The gurus at JP Morgan, home of the London Whale, have an economic model that use consumer sentiment, manufacturing sentiment, building permits, auto sales and unemployment to predict the future, in economic terms (extra Gartman). The chances of a stark raving mad recession over the next 12 month has jumped from 30% to 36% from May 5th.

“Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today,” JPMorgan’s Jesse Edgerton wrote. “This marks the second consecutive week that the tracker has reached a new high for the expansion.”

JPMorgan’s proprietary model considers the levels of several economic indicators, including consumer sentiment, manufacturing sentiment, building permits, auto sales, and unemployment.

The probability of a recession occuring in the next 12 months has never been higher, JPMorgan says.

“The unemployment rate enters the model in two ways,” Edgerton explained. “As a near-term indicator, we watch for increases in the unemployment rate that occur near the beginning of recessions. So this morning’s move down in the unemployment rate lowered the recession probability in our near-term model. But we also find the level of the unemployment rate to be one of the most useful indicators of medium-term recession risk. So the move down in unemployment raises the model’s view of the risk of economic overheating in the medium run and raises the ‘background risk’ of recession.”

The ‘background risk’ of a recession is poppycock. The numbers aren’t too daunting, at 36%. Even if there was a recession, from an investment standpoint, that might be beneficial. The earnings recession has been embedded in the market since 2014. If we confirmed recession, it would give the next President the clout he needed to enact aggressive fiscal stimulus and not depend on the speech givers at the Fed.

Let’s not forget, any economic drawdown will be met with feverish QE.