Hi, everyone. I'm Boyd Nash Stacy.

I'm a senior economist at Board, and I'm here to present

the May 2026 macroeconomic outlook.

Today, we're going to be talking about recessions, but before we dive into the

content, I want to set the stage and really focus on consumer

sentiment,

which has gotten a lot of focus recently,

and mostly from the negative perspective.

So consumer sentiment is near all-time lows,

which is also now being driven down further by the rise in oil

prices due to the closing of the Strait of Hormuz.

So a lot of the concerns are that is

consumer sentiment

an early signal or the canary in the proverbial coal mine for a

recession, or is this noise? Because when we look at other indicators,

like the number of persons unemployed per job opening,

things are actually not looking that bad.

But then there's also some other questions out there in terms of how immigration

policy is going to impact labor supply, and what will be the short and

long-term effects of federal cost-cutting.

But ultimately, consumer sentiment can be volatile and ebb when the

economy is flowing. So let's dive into the prospects for recession, something

top of mind for many business leaders.

So through some quantitative methods, we found that there's three

essential factors in predicting economic recessions.

And let me take a step back and explain what a recession is.

So typically, recessions are

declared by the national NBER, and

what they

base this usually on is two consecutive quarters of negative

GDP growth. So typically, when we think about recessions, the focus is

on gross domestic product growth.

And what we found is there's three essential factors.

And when we say essential, we want something that's good at both predicting

recessions, but then also is good at not falsely

predicting recessions or having false positive.

In essence, predicting recession when there's no recession to come.

And the three factors that we identified are the yield curve spread.

In this case, it's the 10-year yield on a US Treasury

security divided by or subtracted from the six month.

And this spread has been a very strong predictor of recessions

throughout history, as you can see on the chart on the far left-hand side.

In the middle, which is a good representation of household balance sheets, is

the interest expense as a share of disposable income.

Again, as households get pressured in terms of credit

or the

stock of credit on their balance sheets,

this can lead to pullbacks in consumption of

discretionary goods, which tends to drive recessions.

So again, this is another strong indicator of

recessions in the next 12 to 24 months.

And the last one, which really speaks to consumers' kind of net worth,

is cyclically adjusted price to earnings.

This is really just a representation of equity markets that's

normalized over time. So it makes it easier to compare

periods, let's say 20, 30, 40, 50 years ago to the

equity markets of today.

So when we put it all together, we can see that currently

the risk of recession over the next 12 to 24 months is only

12%. And so when we think about in the context of the average,

this is really about average, meaning the economy is not too hot or too cold or

really on the precipice of tipping into recession.

To give a little more perspective in terms of where we are, if we look back to

2022 and 2023, we're about 80% below those

levels. And so, just to give you some context for the economic environment at that

point,

that was characterized mainly by the Ukraine-Russia

conflict and the pressures on the supply chains, but also in a tightening

cycle at the Federal Reserve, where we saw interest rates rise from around

0% to 5% in little over 12 months. So

again, acute economic pressures at that period of time where we're not in that

scenario today.

But one other important thing that I want to highlight with recessions

is not all recessions are created equally, nor do they

impact

individuals, industries, or geographies equally.

So if you look at the right-hand side, it gives us some perspective on how

consumption can vary within a recession in terms of which

segments are more or less impacted, and then over different business

cycles. So for example, in 2008, the global financial

crisis versus the pandemic. And you can

see the pandemic in obvious and maybe a good example would be

gasoline consumption, right? Obviously, with the lockdowns being put in

place in most of the country, obviously, this was the category that was most

impacted during that period of time.

Conversely, if you look at other

slowdowns or recessions, we can see that what we call

the lumpier or the bigger purchases, like autos, can be the most

impacted during those periods of time.

But another lens to look at recessions is to look

across geographies.

So if you look at a distinct group of large and

economically diverse states, we can kind of get a sense of

how these economies have fared over

different business cycles.

So for example, if we look in the 1980s, one of the main

features of the US economy was the kind of

the ebbing away from manufacturing and the struggles that

were being kind of beginning to surface in the Rust Belt

area. And you can see Ohio, in this case, was the most negatively impacted.

So high oil prices, you have headwinds beyond

just energy inputs within the sector.

You can see that state suffered the most.Conversely,

states like Texas and Florida, which not only were less

exposed from an industry perspective, but also were

benefiting from

the population trends over that period of time, with many people

moving to the Sun Belt region, were able to actually grow during that

recession. So not all economies are in recession at the same time.

If we fast-forward to 2001 and the dot-com recession,

you can see that New York being a financial hub and then California being the home

to many of those companies associated with the dot-com

boom and bust, were the ones that were the most negatively impacted.

And then finally, if we think about the 2008 global financial crisis, this

mainly being a housing

crisis kind of focused in the Sun Belt region, you can see

Arizona, Florida being really the areas most

negatively impacted, as well as New York being the financial capital

again, and it being a financial shock.

So again, outcomes can vary widely when we're thinking about the

state impact. But to finish up, let's take a look at

how states are faring today.

And really the good news is that when we look at state-by-state GDP

growth, in this case, this is the fourth quarter of 2015, the last available

data point.

The majority of states, and including the

DC region, are growing. In fact, 49 out of the

51, if we include DC, are actually experiencing positive

GDP growth. So again, no early signs of weaknesses across these

states. What is interesting, though, is that the two areas that

are contracting in terms of GDP growth, DC

area and Maryland, are likely associated with some of the

federal shutdowns that occurred in the latter part of the year, as well as some of

the broader efforts to reduce the federal workforce.

So, I think the important takeaway here is that

even though we are seeing some economic pain in the region, they're not

symptoms that we would expect to spread to the broader economy.

And so when we're thinking kind of where we are and where we're headed,

although consumer sentiment has been weak, the current

economic foundations are quite stable when we look at it from a regional

perspective. So in this case, it might be a little bit of

early signaling from consumer sentiment and not really fundamental to the

prospects for the US economy going forward.

Thanks for taking the time for listening to the May Economic Outlook.

My name is Boyd Nash Stacy. Thanks again.