Sunday, January 17, 2016

The US Economy is Nowhere Near a Recession

The US economy is nowhere near a recession


By: Myles Undland 
The "r-word" is back. 
After the worst 10-day start to a year ever, investors are anxious about not just the prospects for financial markets but the US economy as a whole. 
And now, people are talking about recession
In an email on Friday, Torsten Sløk, chief international economist at Deutsche Bank, wrote, "Over the past six months I have heard more clients say that despite strong nonfarm payrolls we will soon have a recession. Call it the Groundhog Day recession call. Eventually we will get a recession but the question is if a recession is just around the corner."
But as Sløk noted, there are few signs from US consumers that something has gone awry in the economy.
One of the most influential post-financial-crisis books published was Atif Mian and Amir Sufi's "House of Debt," which argued that what really led the US into recession wasn't just an overheating of home prices but the way homeowners borrowed against these home values and eventually stretched themselves too thin, financially.
And so as US consumers began rolling over — cutting out all kinds of purchases in favor of paying debts (and then, in large numbers, eventually defaulting on those debts) — so too went the US economy. Currently, there are no signs that something similar is happening. 
fredgraph (3)
FREDConsumer spending was rolling over about a year before the last recession really hit.
In a weekly email sent Friday, a separate analyst team at Deutsche Bank put Sløk's basic idea arguing against a recession in one clean paragraph, writing:
Falling markets induce recession forecasts quicker than you can scream sell. A Bloomberg survey puts the odds of a US slump this year at one-in-five, double three months ago. Really? In the 12 months leading up to each of the past five American recessions, annual auto sales growth was negative in at least eight months. No single such month so far. And cheap oil keeps those wheels turning. Growth in miles driven, which typically collapses before a recession, is near a decade-high. It’s not just cars Americans are getting around in – planes were also 85% full in December. Finally, for market watchers worried about a flattening yield curve, the ten year-two year spread fell to a post-2008 low of 1.15% this week. The last two times that happened a recession was at least three years away.
Looking at the "real" economy of car-buyers and plane-riders yields few signs that things are slowing down. And a reading on consumer confidence published Friday showed that Americans continue to feel good about their economic prospects. 
Alternatively, signs out of the financial economy indicate that we're still not nearing a recession anytime soon. 
In comments on CNBC on Friday, Larry Fink, the CEO of BlackRock — the world's largest investment firm — said that the market volatility we've experienced will likely lead to layoffs as corporate executives take a more negative view on their business prospects into the first part of this year. And maybe this will be so. 
Saying that the shocks from a financial market sell-off will rattle the confidence of corporate America, however, is a far cry from calling for an outright contraction in US economic activity. 
There are, no doubt, a number of issues US investors can worry about right now if they so choose.
There is an economic slowdown in China to contend with, the prospect of additional interest rate hikes from the Federal Reserve, and yet another quarter of poor earnings growth from the US's largest companies. 
But the US consumer is the heart of the economy, and right now there are few signs that this force is rolling over. 

5 comments:

  1. I would agree with some parts of your article. However, I believe that due to the fact consumer confidence is high right now, the economy will not be entering a recession anytime soon.

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  3. Adding to Jacob's comment, I agree the economy will not be entering a recession anytime soon and that things will improve. There's optimism among big companies such as JPMorgan Chase and Wells Fargo Funds Management LLC that the economy will improve. According to various employees at these companies, "The US economy looks pretty good at this point, and that credit quality across card and commercial lending businesses is as good as its ever been." A solid earnings season could get things back on track and we'd see gradual improvement in the markets.

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  4. I agree with the article. Apart from the recent rise in interest rates, I see no real signs of recession. Obviously, the downturn in global markets is a bad sign, but I believe the American economy will not be too heavily affected. My worry is that in 2018, when I'm trying to find a job, we'll enter a period of recession. So let's hope this period of relative economic stability will continue.

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  5. This is funny, because the article I found had information that says that a recession is in the near future. Information they found were things like the stock market being terrible starting off the year, as well as China and their stock market. Also, the average Post World War II recessions happen every 5 years. Could we come soon? Not sure, but I guess we will find out sooner or later!!

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