Why Could a US Recession Follow the UK?

TL;DR

A US recession could follow the UK’s downturn after a delay because their recessions have occurred around similar periods in modern history, while the deeply inverted 10-year and 3-month yield curve may need to uninvert first. The UK recorded GDP contractions of 0.1% and 0.3% in consecutive quarters, adding to warnings from falling US home prices, persistent inflation, and commercial real estate risks. Read on to understand the indicators and possible timing.

Transcript

two of the world's biggest economies the UK and Japan just fell into a recession so what does this mean for the US markets and I don't mean to be insensitive but this channel mainly covers the US markets the US Stock Market and the US economy so with these dominoes falling historically is there an effect that carries over to the US can we have a re... Read More

Key Insights

• The UK entered a technical recession after GDP contracted 0.1% in the third quarter of 2023 and 0.3% in the fourth quarter. The speaker views this as another warning sign for the United States because UK and US recessions have historically occurred within similar periods.
• Japan entered a recession after GDP contracted 3.3% in the third quarter and 0.4% in the fourth quarter, despite expectations for 1.4% growth. The analysis avoids treating Japan as a close US comparison because Japan experienced repeated recessions across three described lost decades.
• UK recessions have occurred around US recessions in modern history, according to the speaker's research. Sometimes the UK enters first and sometimes the United States does, so the relationship is presented as a shared pattern rather than proof that a UK recession directly causes an American one.
• Median US home prices experienced the largest decline visible on the cited Federal Reserve chart going back to 1965. The speaker compares the move with the notable decline preceding the recession that began in December 2007, while acknowledging that housing prices alone do not establish the full case.
• The 10-year and 3-month yield curve is deeply inverted and receives the greatest emphasis in the analysis. The speaker says a recession has not started while this curve remained inverted, so the large current gap could delay the downturn until the curve eventually uninverts.
• Inflation remained stronger than expected, with CPI reported at 3.1% against an expectation of 2.9%. The speaker argues that this limits the Federal Reserve's ability to cut rates and cites a 90% market-implied probability that rates would remain steady in March.
• Inflation can remain stubborn near the Federal Reserve's 2% objective, according to the historical periods discussed. The speaker expects either prolonged high rates or a recession to lower inflation, and believes a recession is more likely to force inflation down and eventually produce rate cuts.
• Commercial real estate is the speaker's suspected recession trigger because businesses must refinance at high rates while office values decline and vacancies remain elevated. Regional banks may face greater risk because some reportedly hold commercial loans equal to 20% to 30% of their lending, versus 5% to 6% for JPMorgan.

Questions & Answers

Q: Why could a US recession follow the UK recession?

The speaker’s research finds that modern UK recessions have occurred around US recessions, although either country may enter one first. This pattern does not establish that a UK downturn causes a US downturn, but the speaker considers the latest UK recession another warning marker for the United States.

Q: Why did the UK and Japan enter technical recessions?

Each country recorded two consecutive quarters of GDP contraction. UK GDP fell 0.1% in the third quarter of 2023 and 0.3% in the fourth quarter, while Japan contracted 3.3% and then 0.4% despite an expectation of 1.4% fourth-quarter growth.

Q: Why is Japan’s recession considered a weaker signal for the US?

The speaker considers Japan less comparable because it repeatedly moved into and out of recessions from 1991 through 2010 during what he describes as three lost decades. He therefore does not correlate Japan’s recessions with US downturns as closely as he does those of the UK.

Q: What does the inverted yield curve suggest about the timing of a US recession?

The 10-year and 3-month yield curve receives the most attention because the speaker says it has never produced a false recession signal. He argues that a recession has not begun while this curve remained inverted, so its current deep inversion could mean the downturn is still months away and may follow only after the curve uninverts.

Q: How do falling US home prices support the recession forecast?

The speaker describes the current fall in median US home prices as the largest visible on the cited Federal Reserve chart going back to 1965. He compares it with the notable housing decline before the recession that officially began in December 2007, while acknowledging that home prices are not the entire case.

Q: Why could persistent inflation delay Federal Reserve rate cuts?

CPI came in at 3.1% when 2.9% had been expected, indicating that inflation remained stronger than anticipated. The speaker says this limits the Federal Reserve’s ability to cut quickly, while March federal funds futures assigned a 90% probability to rates remaining steady.

Q: Why could commercial real estate trigger a recession?

Commercial real estate faces high refinancing costs, declining office values, and substantial vacancies. The speaker believes these pressures could cause something to break, particularly at regional banks that reportedly hold commercial loans equal to 20% to 30% of their lending, compared with 5% to 6% for JPMorgan.

Q: Can the US stock market keep rising before a recession begins?

Yes, the speaker believes stocks could continue rising while the deeply inverted 10-year and 3-month yield curve takes time to uninvert. He identifies Tesla, which had not reached an all-time high, and the Russell 2000, described as the only major index that had not reached one, as areas that could still have room to rally.

Summary & Key Takeaways

• The UK and Japan entered technical recessions after recording two consecutive quarters of GDP contraction. The analysis treats the UK downturn as more relevant to the United States because modern UK recessions have occurred around US recessions, although the timing varies and the speaker does not claim that one directly causes the other.

• Several US indicators support the recession forecast, including a historically large decline in median home prices and inverted yield curves. The 10-year and 3-month curve receives particular attention because the speaker says recessions have not begun while it remained inverted, suggesting that a downturn may still be months away.

• Persistent inflation could postpone Federal Reserve rate cuts and extend pressure on the economy. The speaker expects a recession, rather than a smooth policy adjustment, to force inflation lower and eventually prompt cuts. Commercial real estate is presented as a possible trigger because refinancing costs, office vacancies, declining values, and regional-bank exposure create vulnerabilities.