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Legg Mason Outlook
Jeff SChulze, investment strategist for Clearbridge Investments, left, Elisa Mazen, global growth ... [+] manager for Clearbridge Investments, center, and Kim Catechis, head of investment strategy for Martin Currie, at Legg Mason's Market Outlook In New York on Monday. KIM CATECHIS, HEAD OF INVESTMENT STRATEGY, MARTIN CURRIE: Lawrence Carrel

Legg Mason, a diversified global asset management firm, said the probability of a recession over the next 12 months is 50%.

According to the variables the firm looks at to determine the health of the economy, recession risk is rising, said Jeff Schulze, the investment strategist for ClearBridge Investments, at Legg Mason's market outlook for 2020 last Monday in New York. ClearBridge is an affiliate that serves as the advisor on many Legg Mason mutual funds.

Schulze said he uses a dashboard of 12 variables that have done a very good job of foreshadowing the last seven recessions. The dashboard runs across four economic fault lines: financial, inflation, business activity and the consumer. Consumer health is the dashboard's biggest part because it's the biggest part of the U.S. economy.

Using a stoplight analogy, the dashboard flashes green when it signals expansion, yellow signals caution and red signals recession. At the end of the third quarter, the yield curve, commodities and ISM new orders were flashing recession. Money supply, wage growth, and profit margins were showing caution. Finally, credit spreads, truck shipments and the entire consumer category of housing permits, jobless claims, retail sales, and job sentiment were signally an economy in expansion.

"We're looking to see whether or not consumer spending can continue to move forward," said Schulze. "If you're seeing cracks in the labor market, and if that does become apparent, our risks of a recession are...

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