WASHINGTON – U.S. manufacturing is shrinking, corporate profits are declining and goods are piling up on warehouse shelves. Those trends have elevated concern that a U.S. recession may loom in the next year or two.
Yet in the one area that matters most, the economy has continued to shine: Hiring.
Last month, employers added 151,000 jobs, a tepid pace by recent standards but still enough to help cut the unemployment rate to a nearly eight-year low of 4.9 per cent. Over the three months that ended in January, hiring has averaged a robust 231,000 a month.
Such a trend typically reflects an economy in prime health, not one nearing a recession.
“It doesn’t feel like to us that the economy is in a bad place,” said Michael Hanson, an economist at Bank of America Merrill Lynch, said. “It would take a very big shock to make a recession case much more likely.”
Most analysts say that while the economy may slow this year compared with 2015, an outright recession remains unlikely. Hanson puts the odds of a recession within the next 12 months at 20 per cent. While still low, that estimate is up from 15 per cent last year.
Here are three trends that point to a potential recession — and three that do not:
No doubt factory output is declining. A jump in the value of the dollar and sluggish economies in Europe, China and Japan have squeezed exports of U.S. goods.
The Institute for Supply Management’s manufacturing index has been below 50 for four months, signalling contraction. Orders for factory goods plunged in 2015 — the first annual drop since 2009, when the economy was just emerging from recession.
And industrial production, as measured by the Federal Reserve, fell 1.8 per cent in December from a year earlier. That was the steepest drop since 2009.
A weak manufacturing sector can be a harbinger of recession. That’s because Americans tend to reduce purchases of costly manufactured items, such as appliances or electronic products, before they start cutting back on more basic services.
Still, manufacturing now accounts for only about 10 per cent of the U.S. economy, a small enough proportion that a factory slowdown probably won’t derail the rest of the economy.
And manufacturers added 29,000 jobs last month, a surprisingly solid total. That suggests that factories that don’t depend on exports may still be doing OK.
A classic recession indicator occurs when companies stock more items than people are willing or able to buy. Those companies then must slash new orders and prices to clear the backlog. This lowers production and profits.
In December, U.S. stockpiles reached 1.38 times sales — the highest level since July 2009, a month after the Great Recession officially ended. Some analysts estimate that the overstocking shaved one-half a percentage point off growth in the October-December quarter. That’s a key reason the economy grew at an anemic 0.7 per cent annual rate in the final three months of 2015.
Yet consumers and businesses are still spending, and that should enable companies to work off their excess supplies, says Nariman Behravesh, chief economist at IHS, a forecasting firm.
One of the most reliable recession indicators in the past has been a drop in longer-term interest rates, such as the yield on a 10-year Treasury, along with a rise in shorter-term rates, such as the yield on a three-month Treasury.
When longer-term rates fall below short-term ones, it produces what Wall Street analysts call an “inverted yield curve.” It’s a sign that investors expect the economy to slip into recession and lead to lower long-term rates.
According to an analysis by economists at Bank of America Merrill Lynch, historically the yield curve has been one of the most accurate predictors of recessions. It has flattened in the past month: The 10-year Treasury yield has sunk from 2.3 per cent to 1.8 per cent.
But with the Fed pegging its short-term rate at between 0.25 per cent and 0.5 per cent, most other short-term rates also remain very low. So the yield curve has not inverted. Analysts at Bank of America Lynch say it’s showing just a 20 per cent chance of recession over the next 12 months.
Other analysts are a bit more worried. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, says the bond market has reacted more sharply to recent signs of an economic slowdown. That suggests that investors are more concerned about the U.S. economy, rather than simply reacting to weakness in places like China.
Most economists still see a recession this year as unlikely. Here are three reasons why:
Though economic growth weakened in the final three months of last year, businesses kept on adding jobs. That means more Americans are earning paychecks to spend.
And while average wage levels are growing only slightly, there are signs that the steady pace of job growth is compelling companies to pay more to attract employees. Average hourly wages rose 2.5 per cent in January compared with a year ago, a brisk advance from the weak 2 per cent trend that’s prevailed since the recession.
That means consumer demand — the U.S. economy’s lifeblood — will likely stay sound.
As the saying goes, recessions typically don’t die from old age. Instead, there’s usually a trigger that kills them. And most of the usual suspects aren’t evident.
A stock-price bubble helped tip the economy into a recession in 2001. A housing bubble triggered the deep 2008 downturn. Yet by most measures, neither stocks nor housing are nearly as overpriced as they were then.
The Federal Reserve has frequently been blamed for causing recessions by raising rates too quickly. And while it boosted its benchmark short-term rate in December for the first time in nine years, most economists forecast that it will raise rates very slowly this year, if at all.
Finally, sharply higher oil and gas prices have preceded or accompanied every recession since the 1970s. But oil prices right now are plunging.
“Those traditional recovery-killers just aren’t there,” Behravesh says.
Investors are worried about much slower growth in China, where many American multinationals have invested a lot of money. Yet few American consumers share that concern.
Instead, consumer confidence rose in December, according to the Conference Board, a business research group, despite some volatility in the stock market that month.
With low gas prices leaving more money in consumers’ wallets and borrowing costs low, most economists expect Americans to spend at a decent pace this year and bolster economic growth.
Sales of new homes surged in December to the healthiest level in 10 months. Sales of existing homes rose 6.5 per cent during 2015, though that pace is expected to slow a bit this year.
“Why would the consumer stop spending?” Behravesh asked. “They don’t care about China.”
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