The US and Recession: Tempest in a Teapot?

Latest figures of the US economy, tumbling equity prices, and the present bias in major economies towards continuing and expanding easing has led investors around the world to start to question whether the US is beginning to settle into a recession.

During the past few weeks, the US economy displayed not too credible numbers in favor of continuing rate hikes, posting a 0.7% advance in GDP growth quarter-on-quarter and thus undershooting the expected rate of 0.8%. Furthermore, a few weeks later, the upset continued with the economy adding only 151,000 jobs versus the expected 189,000 in January after a strong addition of 292,000 jobs in December. Nevertheless, in January, the unemployment rate dropped to a record low of 4.9%.

Moreover, the past week was accompanied by a substantial equity sell-off. Dow Jones futures were off more than 300 points at one stage, WTI fell more than 3 percent to under $27 per barrel, 10-year Treasury yield was dipping below 1.6 percent, and the dollar was down about 1 percent against Japanese yen.

Furthermore, China’s slowdown and unstable demand, Europe’s and Japan’s confidence in continuous easing, and the negative interest rate policy (NIRP) have all stimulated ongoing discussions about how these major bearish factors are and will keep affecting the growth of the United States. Of course, these are not pleasant surroundings for superior growth and could easily constrain the potential growth quite considerably. In addition, the Fed funds rate futures contracts indicate no rate hikes till 2018 and are even pricing in a small possibility of a rate cut. Listening to the Fed, one gets an impression that these are not the things the Fed looks like while choosing the course of further movements. That said, it would be short-sighted to underplay the importance of the market moods for their policies, in particular given the persistence of those moods.

Having stated this, it would seem quite reasonable to conclude that not only the economic environment is blocking nations from prosper, but that it is more likely for the US economy to fall in a recession rather than boost the growth rate. But not so fast! In spite of many opinions that the US economy might be due to a fall in a recession, there is some very concrete reasoning why a recession is unlikely, at least not just yet. Fundamentals are still extremely sound in the United States. The economy has created millions of jobs since the last recession, including 292,000 jobs in December. Average hourly earnings grew by 0.5% vs. the expected 0.3%, implying that a payroll growth enables stronger consumer spending, which feeds back into a higher job growth. After all, the economy is still expected to grow 2.6%.

Therefore, it is reasonable to close by declaring that the current feebleness of the world’s economies and the turmoil in the markets restrict the potential growth of the US, while at the same time these facts are insufficient to make such a bold statement as a “recession”. And as the Fed’s Chair Janet Yellen told the Senators last Thursday, “there is always some chance of recession in any year, but the evidence suggests that expansions don’t die of old age.”

By Reinis Novickis,
Market Analyst at the Investment Fund