Are We Headed for Recession?
Talk of a downturn is in the air, and the numbers are squiggly
People who ordinarily ignore
economic forecasters are eager for whatever intelligence they can glean. What’s grabbed their attention is the
January plunge in the U.S. stock market,
the worst two-week start
on record. If the bears are right,
profits and economic growth in
general are going to be weak in
2016. Even if the bears are wrong,
the drop is making investors less
willing to spend. Nobody knows
what’s going to happen next.
“The fact that economists have
a particularly poor track record
of calling turning points in
growth only adds to underlying
anxiety,” Joseph LaVorgna, chief
U.S. economist at Deutsche
Bank Securities, wrote to clients
on Jan. 19.
Weakness is emanating from China, where pessimism has driven
stock prices down 40 percent
since June, vs. a decline of 12 percent in the U.S. With trade declining, there’s
been a sharp drop in the
Baltic Dry Index,
a measure of cargo shipping rates.
Oil prices
are also down, reflecting not just an increase in supply but falling demand.
That’s bad for businesses and workers in the U.S. oil patch.
One way trouble abroad gets transmitted to the U.S. is through
a rising dollar.
When other economies weaken,
the world’s investors flood into the U.S. in search of higher returns, buying dollars as
they do. The strong dollar is already showing up in a
decline in import prices
—bad news for U.S.
companies that compete with imports.
The
Morgan Stanley Business Conditions Index
fell
this month to its lowest level since February 2009. Ellen Zentner, Morgan Stanley’s chief U.S. economist, headlined her report, “Losing Faith.”
Auto sales
, which had been climbing steadily for years, have fallen from their peak.
Manufacturers, more sensitive to trouble abroad because
of their reliance on exports, have seen a sharp drop
in their main
index of activity.
The economies of more than 9 in 10 U.S. counties
still haven’t gotten back to their prerecession peaks. Analysts estimate that
profits of Standard & Poor’s 500 companies
in the last quarter of 2015 had their biggest drop from the year before since 2009, according to data collected by Bloomberg.
While all this is going on, the Federal Reserve has its finger on the interest rate trigger. The Federal Open Market Committee has already raised the federal funds rate target once, to a range of a quarter percent to a half percent. The midpoint of the “dot plot” of Fed officials’ forecasts is for the
federal funds rate
to reach 1.25 percent to 1.5 percent by the end of 2016, a level that bears think could stop the fragile U.S. expansion.
There’s nothing fragile about this expansion, answer the bulls. The economy has
created millions of jobs
since the last recession, including 292,000 jobs in December. This is the longest run of consecutive monthly employment gains in records going back to 1939. The U.S. Bureau of Labor Statistics tracks an
index of payrolls
consisting of average hourly pay multiplied by average hours worked per week multiplied by the number of
workers. It’s up one-third
from six years ago. In a
virtuous cycle, payroll growth enables stronger consumer spending, which feeds back
into more job growth. The
number of openings
has more than doubled since 2010
to better than 5 million, indicating that the hiring expansion has room to run. Sure, the pace of
initial filings for unemployment insurance
has picked up a bit, but it’s still far below its recent average.
The cheap oil that the bears worry about is good news for the bulls, because
lower gas prices
leave more money for people to
spend on other things.
Americans have been paying down debt, and their
financial obligations
have been declining as a share of their disposable income
Consumer sentiment
is close to its strongest of this business cycle. And there’s no hint of a bursting housing bubble: True, construction
starts fell in December despite warm weather. But
affordability
remains well above the worst levels of 2006 and 2007.
The bottom line is that a 2016 recession is unlikely. The
Conference Board’s index
of leading economic indicators points to
growth.
Macroeconomic Advisers
, a forecasting firm, expects the economy
to bounce back from a very weak fourth quarter in 2015. Participants in the Federal Reserve Bank of Philadelphia’s latest Survey
of Professional Forecasters see only a small
chance of
gross domestic product shrinking
in any quarter this year. Then again, those soothsayers weren’t predicting a recession at the
start of 2008, either. They
didn’t realize that one had already begun.
