Olivia Albrecht, Senior Vice President:Hi. I’m Olivia Albrecht, and I’m joined by my colleagues, Joachim Fels and Scott Mather, to discuss PIMCO’s cyclical outlook. So, let’s start in with this first debate. How late are we really in the cycle? So, Joachim, help us understand. What was the debate? How did we frame it? And how did we settle out on it?
Joachim Fels, Global Economic Advisor:The theme that we’re in the later stage of the business cycle has been around for some time at PIMCO. So, all of last year, we said we are getting closer towards the end of the expansion. So, we took a deep dive again. Recession models now show a higher probability of a recession over the next 12 months than at any time during this expansion. Having said that, I would say they are flashing orange, rather than red.
Chart: A line graph compares U.S. recession probability model spikes followed by highlighted areas of actual recessions from 1966 to 2016.
So, the recession probabilities that these models spit out for the US and for the eurozone are still below 50%.
Chart: A line graph compares eurozone recession probability model spikes with highlighted areas of actual recessions (between 2007 and 2009; between 2011 and 2013) overlayed from 2001 to 2017.
But again, they have risen. So, there’s now maybe a 1/3 chance of a recession over the next 12 months. But this is only a model-based input. This is only what the data, the financial indicators, and the economic indicators are telling us.
Then if you take a more qualitative assessment – and we discussed that at the forum – we don’t see the typical imbalances that have preceded past recessions and have caused past recessions.
So, first of all, we’re not seeing signs of overheating in the US – at least not if you look at core CPI inflation or core PCE inflation,
Chart: A line graph compares peaks and troughs of U.S. core CPI growth (year over year) versus seven recession periods from 1966 to 2016.
which is pretty much flat like a pancake. So, no need, you could say, for the Fed to massively overshoot.
Chart: A line graph compares peaks and troughs of net lending rates (% GDP) versus seven recession periods in the U.S. from 1966 to 2016.
And secondly, we’re not seeing the private spending excesses that have typically preceded actually the last three downturns. If you look at private-sector net lending or the savings position in the US, it has come down a little bit but people are still saving more – or earning more than they spend. And this is very different from the past cycle. So, overall, we would say we’re getting later in the cycle, but it’s not five to midnight yet.
Scott Mather, CIO U.S. Core Strategies:Yeah. There, I think it’s important to remember the experiences of some countries, like Australia, which are entering almost – it’s been almost three decades without a recession.
Now obviously, many big changes in financial markets, financial market performance – many different cycles. But it doesn’t – just a good example to remind ourselves that expansions don’t die of old age necessarily.
Olivia:Yeah, absolutely. And just because we don’t see a recession on the horizon doesn’t necessarily mean that we’re going to have smooth sailing in terms of financial markets, as well.
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