AIER’s Business-Cycle Conditions model rebounded in May to 50, a neutral position, following two months at 38, a level that had indicated economic weakness. This uptick supports our expectation that a strong labor market would boost consumer sentiment and spur further gains in consumer spending. It also justifies our reluctance to assert that a recession was likely when our index first fell below neutral. With our Leaders back at the 50 threshold, AIER researchers judge the risk of recession has receded, although it is still slightly elevated.
With the year’s midpoint approaching, we turn our attention to the outlook for the second half of 2016. Analysts and investors are likely to vacillate between two narratives that seem to be mutually exclusive: weakness and strength. In a slow-growth environment, periods of weakness are likely to renew fears of recession, while spurts of strength should rekindle debate about rising price pressures, a less accommodative Federal Reserve policy, a tightening labor market, and rising wages (Chart 1). These two narratives will be buffeted about within the context of the election season.