by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy expanded further in August, showing signs of accelerating momentum. Reflecting this strength, our proprietary Confluence Diffusion Index posted its 19^th consecutive month in expansionary territory. Infrastructure buildout driven by AI, along with sustained consumer spending, continues to surprise to the upside. However, elevated interest rates and persistent inflation remain primary headwinds for the current expansion cycle.

Financial Markets

Financial conditions tightened moderately in August amid growing concerns over rising inflation and potential monetary policy tightening, fueled by hawkish comments from the Fed. During his Jackson Hole address, Fed Chair Kevin Warsh noted that the economy was showing signs of overheating, signaling that the central bank may need to act. The tightening was primarily driven by higher short-term interest rates, while long-term rates were relatively unchanged. Despite these policy concerns, markets held firm as investors remained confident in corporate earnings resilience.

Goods Production & Sentiment

Goods manufacturing was relatively stable last month, though inflation is still a primary concern. The latest ISM report showed that supplier deliveries slowed in August, signaling that production capacity was beginning to stretch. This pressure appears to be driven by reindustrialization efforts, particularly within AI and defense. While growth was solid, inflation continued to weigh heavily on firms and consumers as rising input costs began pushing up goods prices.

Labor Market

The labor market tightened as labor supply shrank while hiring accelerated. The economy added 162,000 jobs last month, the broadest job growth since March, driven by a pickup in local government and construction hiring. The unemployment rate held steady at 4.1%, with a slight rise in unemployed individuals offset by a decline in overall labor force participation. Layoff risks are low as initial jobless claims continue to hover near historic lows.

Outlook & Risks

Third quarter economic momentum remains strong despite broader concerns. The Atlanta Fed’s GDPNow estimate is projecting an annualized 5.1% expansion — the fastest pace since Q4 2021. This acceleration complicates the Federal Reserve’s upcoming policy decisions regarding whether to tighten further to prevent overheating. Although near-term growth projections over the next six months are solid, prolonged elevated interest rates pose a medium-term risk to momentum.

The Confluence Diffusion Index for September, which provides a composite view of the economy based on 11 benchmarks, continues in expansionary territory based on August data. The index’s value rose from a revised +0.2121 to +0.2727 and has risen above the expansion line for the first time since 2022. The index shows that the economy remains resilient in the face of geopolitical shocks and rising interest rates. Only three of the 11 benchmarks are in contraction.

• The hawkish Federal Reserve stance is driving up short-term yields.
• Goods production remains resilient despite persistent inflation.
• Hiring activity has accelerated nationwide.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. A chart title listed in red indicates that the index is signaling recession.

Read the full report

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy expanded further in July, continuing its trend of resilience. Reflecting this momentum, our proprietary Confluence Diffusion Index remained in expansionary territory for the 18^th consecutive month. Heavy investment and robust consumer spending fueled overall economic strength. However, elevated inflation and high interest rates persist as key headwinds that continue to drag on sensitive sectors.

 Financial Markets

Financial conditions tightened in July, driven by escalating geopolitical risks and mounting uncertainty over future monetary policy. Last month, fears that the Federal Reserve might not raise rates to combat persistent inflation pressures pushed long-term yields higher. This led to a steeper yield curve as investors sought to reduce duration risk. Nevertheless, ample market liquidity continues to buffer against a broader financial downturn.

Goods Production & Sentiment

Overall production was mixed in June. While manufacturing has been resilient, construction activity and consumer sentiment remains subdued. Supplier delivery times lengthened last month, driven by a surge in orders tied to World Cup festivities and the nation’s semiquincentennial (250^th Fourth of July) celebrations. However, weak consumer sentiment persists as households grapple with affordability concerns, and high input and borrowing costs continue to drag on residential construction.

Labor Market

The job market showed signs of improvement, with layoffs remaining low; however, persistently weak hiring numbers continue to raise concerns. In July, US payrolls unexpectedly contracted, driven by a reduction in government employment and only modest gains in service-sector jobs. The unemployment rate fell to 4.1%, its lowest level since June 2025, though this decline was partly attributable to a shrinking labor supply as labor force participation dropped to its lowest point since 2021. That said, jobless claims have remained relatively subdued, suggesting that firms are still not feeling pressured to resort to widespread layoffs.

Outlook & Risks

The latest data indicates that the economy remains in solid shape. July was a particularly strong month for business investment, while firms also capitalized on a boost in spending driven by the holiday weekend and major sporting events. However, signs of cooling emerged as these seasonal catalysts wound down. Looking ahead, mounting uncertainty around geopolitical risks and monetary policy represents the primary headwind to medium-term growth. Nevertheless, we don’t see substantial evidence suggesting a broader economic downturn.

The Confluence Diffusion Index for August, which provides a composite view of the economy based on 11 benchmarks, stayed in expansionary territory based on July data. The index’s value fell from +0.2121 to +0.1515 but is still well above the recovery signal threshold of −0.1000. The index shows that the economy remains resilient in the face of geopolitical shocks. Only three of the 11 benchmarks are in contraction.

• Long-term yields trended upward due to persistent inflation concerns.
• Output accelerated as firms expanded capacity to meet rising demand.
• Hiring slowed, but firms continued to retain their current workforces.

 

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy expanded further in June, continuing to demonstrate resilience. Our proprietary Confluence Diffusion Index held in expansionary territory for the seventeenth consecutive month. While the broader economy continues to be in good shape, we are closely watching a few key areas. Market sentiment is losing momentum, weighed down by geopolitical uncertainty and stretched valuations. Additionally, investment spending remains concentrated in just a few sectors where demand is high, while hiring appears poised to slow in the coming months.

Financial Markets

Markets reduced duration exposure amid ongoing geopolitical tensions in the Middle East and growing concerns over the sustainability of AI-related investments. The yield curve flattened as investors began recalibrating their expectations around interest rate hikes, driven by fears that escalating regional uncertainty could stoke inflation and prompt a response from the Federal Reserve. At the same time, rising capital expenditure among major tech companies has fueled worries that these firms may struggle to return capital to shareholders. In response, investors have rotated toward more undervalued sectors. However, given the market’s heavy tech weighting, this rotation has tempered the broader index gains, resulting in a more subdued rise in overall stock prices.

Goods Production & Sentiment

Overall production remains solid, though sentiment among both households and firms is subdued. Housing starts picked up, and spending on capital goods continued at elevated levels. This uptick in activity may partly reflect renewed optimism following a cooling of US-Iran tensions in June. Still, a sense of uncertainty persisted. While factory deliveries improved, overall manufacturing sentiment declined, weighed down by ongoing concerns over persistently high prices. Consumer sentiment edged up from the previous month but still sits below year-ago levels, suggesting that households remain cautious, likely due to worries about inflation. Despite this, spending continues to hold up well.

Labor Market

The job market continues to signal a low-hire, low-fire environment. June employment data came in well below expectations at 57,000 jobs added compared with the consensus forecast of 115,000. The subdued pace of job growth comes as hiring remains fairly concentrated in healthcare services. That said, the unemployment rate edged down slightly from 4.3% to 4.2%, while overall jobless claims continue to trend lower, suggesting that firms are satisfied with current employment levels.

Outlook & Risks

This month’s economic data suggests that the economy is still relatively stable, given the ongoing uncertainty surrounding the Middle East and AI. The resilience appears to be driven by strong demand, supported by a still-tight labor market and a robust push to build out infrastructure to meet growing AI-related needs. While we believe that inflation remains a risk, we continue to expect the economy to expand, likely at a moderate pace over the next 12 months.

The Confluence Diffusion Index for July, which provides a composite view of the economy based on 11 benchmarks, stayed in expansionary territory based on June data. The index’s value was unchanged at +0.2121, well above the recovery signal threshold of −0.1000. The index shows that the economy remains resilient in the face of geopolitical shocks. Only three of the 11 benchmarks are in contraction, up one from last month.

• Equities cooled amid rising uncertainty over the Middle East and AI-related headwinds.
• Inflation fears eased, supported by progress toward resolving the conflict in Iran.
• The labor market continues to be tight, though demand appears to be gradually fading.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy continued to expand in May, with signs that growth is holding steady. Our proprietary Confluence Diffusion Index remained in expansionary territory for the sixteenth consecutive month. That said, several areas warrant closer monitoring. Financial conditions are showing some signs of tightening, although liquidity remains ample. Firms are still investing; however, households remain concerned about rising inflation. Meanwhile, hiring continues to pick up but is still below levels consistent with a solid expansion.

Financial Markets

Bond and equity markets showed signs of cooling as investors braced for rising geopolitical tensions in the Middle East. Equities were notably volatile throughout the month, driven in part by intermittent negotiations between the United States and Iran over reopening the Strait of Hormuz. At the same time, the yield curve experienced a bearish steepening, reflecting an increased willingness by the Federal Reserve to tighten policy in response to persistent inflation. This shift was reinforced by several Fed officials advocating for the removal of language signaling an easing bias in the policy outlook.

Goods Production & Sentiment

Signals from the production and sentiment side of the economy were mixed. Business investment remains resilient, supported largely by continued spending on AI infrastructure and defense. However, there are emerging signs of strain in other sectors. Housing starts declined, partly due to rising materials costs. Meanwhile, both consumer and business sentiment have softened amid concerns about the Middle East conflict and its implications for prices. This is particularly evident among households, which continue to express concerns about their current financial situation compared to a year ago, even as forward-looking expectations have modestly improved.

Labor Market

May employment data came in stronger than expected, offering renewed evidence of firm labor demand. Payroll growth significantly exceeded expectations, more than doubling consensus forecasts. Job gains were concentrated in leisure and hospitality, healthcare, and local government, with early signs of a pickup in construction employment as well. Layoffs remain subdued, with the unemployment rate holding steady and initial jobless claims declining the previous month. Overall, the data suggests that labor market momentum may be strengthening.

Outlook & Risks

The economy appears well positioned to sustain the current expansion. Recent data indicates that the economic impact of the Iran conflict has been largely contained, with inflation being the primary transmission channel. Growth continues to be supported by robust capital expenditure in AI and ample credit availability, which has enabled households to maintain spending despite rising prices. While a potential hawkish shift by the Federal Reserve presents a risk to both markets and growth, it may be premature to draw firm conclusions about the policy path given the ongoing leadership transition at the central bank. On balance, near-term economic conditions remain constructive, and the outlook over the next 12 months has improved alongside easing geopolitical tensions.

The Confluence Diffusion Index for June, which provides a composite view of the economy based on 11 benchmarks, remains in expansionary territory based on May data. The index’s value was unchanged at +0.2121, well above the recovery signal threshold of −0.1000. The index shows that the economy remains resilient in the face of geopolitical shocks. Only four of the 11 benchmarks are in contraction, up one from last month.

• Expectations of tighter monetary policy led to a flatter yield curve.
• Inflation expectations continued to weigh on consumer sentiment.
• Hiring is showing signs of gaining momentum.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

by Thomas Wash | PDF

Note: This report was delayed due to severe data lags caused by the government shutdown. Although data for the missing months will not be released, the report is written as if no disruption occurred.

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities.  The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis.  Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The US economy continued to expand in April, with overall conditions improving. Our proprietary Confluence Diffusion Index remained in expansionary territory for the fifteenth consecutive month, with no indicators entering or exiting contraction, leaving three of 11 signals in warning territory. That said, several areas warrant closer monitoring. Financial conditions point to ample liquidity — particularly within the technology sector — while signals from the real economy remain mixed. Business investment is holding up, but households and firms are increasingly concerned about higher inflation. Meanwhile, labor market momentum has strengthened.

Financial Markets

AI continues to support equities, with related stocks benefiting from sustained capital expenditure by large technology firms. Much of the improved sentiment since April has been driven by strong corporate earnings and expectations of de-escalation in the US-Iran conflict. This rebound in risk appetite comes roughly a year after the “Liberation Day” shock, with markets increasingly confident in their ability to look through geopolitical disruptions. At the same time, rising debt levels and renewed inflation concerns have pushed up both long-term yields and short-term rates, even as fiscal support continues to flow into the economy.

Goods Production & Sentiment

April’s economic data presented a mixed picture, as the war-driven energy shock weighed on both households and firms. Residential construction edged lower but remained resilient, with homebuilders navigating higher energy costs and borrowing rates. New orders strengthened as firms built inventories to get ahead of the potential supply chain disruptions tied to the conflict in Iran. Consumer confidence was the weakest component, easing from the prior month as households increasingly began to anticipate higher inflation for the months ahead.

Labor Market

The US labor market showed further signs of improvement, with hiring picking up modestly. Nonfarm payroll growth has resumed at a moderate pace, led by continued strength in healthcare, while transportation and warehousing are also gaining momentum. The unemployment rate edged higher and remains above levels seen two years ago. However, layoffs are still relatively contained, with initial jobless claims only slightly higher than the previous month.

Outlook & Risks

The economy remains on solid footing, supported by strong underlying fundamentals that were in place before the conflict in Iran escalated. We continue to expect the AI investment boom to support both growth and asset prices, as sustained capital spending underpins economic activity. However, we are increasingly concerned about the direction of monetary policy. The Federal Reserve has turned more hawkish in recent weeks, raising the risk of tighter credit conditions. This shift could become a headwind, particularly as firms and households grow more reliant on credit to finance investment and consumption. Still, the near-term outlook remains firm, while the medium- to longer-term trajectory is more cautiously optimistic.

The Confluence Diffusion Index for May, which provides a composite view of the economy based on 11 benchmarks, remains in expansionary territory according to April data. The index’s value was unchanged at +0.2121, well above the recovery signal threshold of -0.1000. The index shows that while the overall economic outlook is solid, we have not seen the full impact from the conflict in Iran. This is further evidenced by the fact that only three of the 11 benchmarks are in contraction, unchanged from last month.

• Rising inflation fears have led to a steeper yield curve.
• Consumer sentiment is being weighed down by inflation concerns.
• The labor market appears to be gaining momentum.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report