Recession fears still swirling despite jobs report

Not to spoil the afterglow from last week’s blockbuster report on job growth in June, but some economists are still fretting about the rising risk of recession.

The employment report appeared to alleviate worries of a downturn that had built after two consecutive months of feeble payroll gains and market fallout from the United Kingdom’s vote to leave the European Union. It showed that employers added a booming 287,000 jobs last month. Meanwhile, stocks have more than recovered their Brexit-related losses and are at record highs. And most analysts estimate the economy grew a solid 2.5% to 3% in the third quarter.

But economists are a wonky lot, and they’re focused on an armada of more subtle indicators that are flashing yellow. UBS puts the risk of recession at 34% within the next 12 months, up from 23% a year ago, and JPMorgan Chase gives it 37% odds, both high marks for the firms in the recovery.

That doesn’t mean a recession is in the cards, but it does suggest the U.S. economy could be more vulnerable to a negative shock, such as an escalation of economic troubles in China, UBS credit strategist Stephen Caprio says. Here are some of the concerns:

Slowing job gains. Yes, employment growth rebounded in June, but monthly gains are still averaging just 147,000 the past three months and 172,000 so far this year, well below last year’s 229,000 pace. Many economists cite a natural slowdown now that the below-5% unemployment rate is supplying employers with fewer available workers.

But Barclays Chief U.S. Economist Michael Gapen says marked drop-offs in payroll gains from the recovery average typically herald recessions nine to 18 months later. He adds, however, that another strong jobs tally in July could ease such fears.

As employers compete for fewer workers, they typically raise wages more sharply, stoking consumer spending and making up for the slower job growth. But while pay gains have picked up

modestly, Deutsche Bank says they may remain subdued because of sluggish labor productivity growth. Shrinking profits. The second-quarter earnings season, which got underway Monday, is expected to reveal that profits fell for a fourth consecutive quarter, an ongoing “profit recession.” Historically, profit recessions often, though not always, presage economic slumps.

Tighter credit. Banks toughened their credit standards for the third consecutive quarter in the first three months of the year, according to a Federal Reserve survey. Credit conditions for commercial real estate loans tightened especially sharply.

Meanwhile, high-yielding debt for riskier companies is near record levels; high-yield bond issuance is down 35% this year; and yields on such “junk” bonds have risen to 6.7% from about 4.7% in early 2014, UBS’ Caprio says. That, he says, could lead to higher default rates for such debt, prompting banks to further rein in lending and curtailing economic activity.

“It’s definitely an area of concern,” he says. Slowing auto sales. Auto sales fell 5% in June, according to a report last week. Declining car sales can be a reliable indicator of a coming recession, JPMorgan says. Monthly counts can be volatile, but Deutsche Bank notes that annualized sales also fell in the second quarter to 17.1 million from 17.3 million in 2015. Global weakness. The U.K.’s vote to leave the EU will likely nudge Britain into recession early next year and raises the risk of recession in the euro area, Goldman Sachs says. That further crimps a sluggish global economy that has pummeled U.S. manufacturers’ exports.

Other economists don’t foresee a recession. “I’m not seeing any ( bubbles in the economy)” that would lead the Fed to raise interest rates rapidly, a typical trigger of recessions, Jim O’Sullivan of High Frequency Economics says. And initial jobless claims, a gauge of layoffs, remain low.