Are Recession Fears Just Hype?
U.S. equity markets ended another volatile week lower despite a bounce in oil prices. For the week, the S&P 500 lost 0.81%, the Dow fell 1.43%, and the Corporate Bond Index was flat.
Amid volatile stock prices and disappointing global economic news, you may have heard a lot of chatter on media networks about whether the U.S. economy is facing another recession. In this week's market update, we wanted to dig into that topic.
Why is there so much talk about a recession?
With oil prices barreling below $27 amid a global slowdown, a lot of financial commentators are talking more often about the potential for a U.S. recession. These recession fears are not baseless and should be taken seriously, but predicting a recession is always a difficult exercise because it relies on balancing positive and negative indicators, and many of those are based on old data. We heard from Federal Reserve Chair Janet Yellen last week that the Fed sees a mixed economic picture ahead. She further warned that the U.S. economy could feel the effects of economic turmoil abroad. Though Fed economists aren't currently worried about a recession, you can bet that they are taking a close look at potential recession triggers. What are they looking at?
•Continued weakness in oil and commodity prices that are hurting energy producers.
•Emerging market issues (particularly in China) that affect exports and U.S. firms.
•Falling demand in the manufacturing sector.
•Worries that global central banks are out of bullets to stimulate economies.
So, what's the good news?
Despite all the doom and gloom in markets right now, the U.S. economy is not lying down and giving up. Here are a few of the things experts see in the pro-growth column:
•The economy is approaching full employment and employers are still hiring.
•Wages are increasing, Americans are taking home bigger paychecks, and household savings are growing.
•Consumers are still spending money on big-ticket items like electronics and motor vehicles.
•U.S. exports to Brazil, Russia, India, and China - four of the largest emerging markets - totaled just 1.14% of U.S. GDP in 2014. That's a drop in the bucket of total economic activity.
Will the economy slide into recession in 2016?
No one knows that answer, but we do know that recessions don't just happen for no reason. As Yellen put it in her remarks to Congress: "The evidence suggests that expansions don't die of old age." In short, something has to happen to cause a recession and the Fed doesn't see anything on the horizon yet.
That's not to say that the economic picture is rosy. Economists are not predicting breakout growth in 2016. However, they're also not predicting a recession. The Wall Street Journal forecasts first-quarter 2016 Gross Domestic Product (GDP) growth of 2.0%. The Atlanta Fed is more optimistic, predicting 2.7% growth.
Some opinion polls suggest recession risk is rising; the latest Wall Street poll of economists put the risk of a recession in the next 12 months at 21%, double where it was in June. However, the same poll reported recession probabilities of 16% in January 2011 and 17% in January 2012. Neither year ushered in a recession. The reality is that we won't know when a recession starts or ends until it has already happened, and there is no way to predict it with any certainty.
The calendar year 2016 has been a very rocky road for equities so far, and the volatility is likely to stick with us for a while. Bad news has dominated markets for weeks and we don't know when sentiment will swing the other way. However, let's remember that the current selloff is coming after years of sustained growth.