Trump’s tariff u-turn averted hard landing, but US recession risks climbing: UBS

UBS warns that U.S. recession risks are climbing, with their aggregate recession probability model now at 37%, up 11% since December. The increase is driven by weakening hard data (production, employment, capex, etc.) which indicates a 46% recession probability, a rising yield curve signal (18% probability), and tightening credit conditions (48% probability, the highest since the pandemic). While some data volatility may be linked to tariff pull-forward effects, UBS emphasizes the widespread weakness across various economic indicators, suggesting a potential return of recession concerns in financial markets.

Analysis

UBS has issued a warning regarding escalating U.S. recession risks, with their proprietary aggregate recession probability model now indicating a 37% chance, an 11 percentage point increase from the December low of 26%. This heightened risk is attributed to a confluence of negative signals. Specifically, UBS's hard data model, which encompasses production, employment, capital expenditures, housing, income, and spending, points to a 46% recession probability, reflecting a broad-based weakening in April where the indicator increased by 12 percentage points. Although acknowledging potential volatility from tariff pull-forward effects, UBS underscores that the observed weakness is widespread across these factor components. Concurrently, the yield curve signal, a traditionally monitored recession gauge, has re-emerged as a concern, with its model suggesting an 18% probability. Furthermore, credit conditions are signaling significant caution, with the credit metric-based recession probability model reaching 48%, its highest level since the pandemic, indicative of rising financial fragility. While the U.S. economy appeared to be on stable footing at the beginning of the year, UBS analysts caution that continued deterioration in economic data could re-ignite discussions about recession risks and foster a more worrisome narrative in financial markets.

Key Decisions for Investors

• Investors should closely monitor the evolution of hard economic data, yield curve dynamics, and credit market conditions, as highlighted by UBS, for further signs of economic deceleration.
• Given the reported 37% aggregate recession probability and weakening underlying indicators, a review of portfolio risk exposure and consideration of more defensive positioning may be warranted.
• Be prepared for increased market volatility and a potential shift in market narrative towards recessionary concerns if incoming economic data continues to underperform expectations.