ABN AMRO is urging equity investors to be cautious as prices are not yet reflecting the downturn in the US economy.

It believes equity analysts and many economists are still too optimistic. Key indicators suggest that confidence levels in industry are at historic lows, the labour market is being squeezed and consumers are having to tighten their belts.

Joost Van Leenders, investment strategist with ABN AMRO Asset Management, said: “We assume there will be a recession, and if investors do likewise, they would do well to be cautious with equities.”

Producer confidence in industry, traditionally a good gauge of future growth, had the sharpest fall in January since early 2003. Falls of this magnitude have occurred only 13 times since 1990. Van Leenders added: “Historically, the present level does not mean the economy is in recession, but the direction is clear.”

The investment strategist believes that in the present situation, the first signs of recession are more likely to come from the housing and consumer markets. But if producer confidence is already falling this quickly, this is a cause for concern.

A key part of the US economy, the labour market has been in good shape for a long time. But in December, there was virtually no jobs growth. In the private sector, jobs were actually lost. Unemployment shot upwards as a result. It has risen by 0.6% to 5.0% over the last 12 months. Historically, at least since 1945, every time that unemployment has risen so sharply, the economy has gone into recession.