I keep reading the United States is on the verge of a recession. The Federal Reserve “may have made a huge mistake” by raising its benchmark interest rate from zero to 0.25% in December, according to Wonkblog, the Washington Post’s niche offering for wannabe Nobel laureates and other policy geeks. Jason Kirby at Maclean’s wrote about a fellow who foresaw the collapse of oil prices and now predicts future assessments of current data will show the U.S. was in a recession at the start of 2016. And then there’s the markets: all that volatility must be a sign of something other than good.
U.S. gross domestic product expanded at an annual rate of 0.7% in the fourth quarter, a rather feeble expression of strength by the economy that is supposed to lead the world out of this latest phase of post-crisis malaise. Canadian investors, beaten up by the collapse of commodity prices, are piling sandbags around their portfolios. Benjamin Tal and Royce Mendes, economists at CIBC World Markets, estimate that Canadians currently hold about $75-billion in excess cash that they typically would have used to purchase assets that promise a return. That’s a lot of fear. Given Canada’s tight economic links to the U.S., one has to assume a degree of that trepidation comes from doubts about the strength of the world’s largest economy.
Official sources say the U.S. will do fine this year. The International Monetary Fund predicts growth of 2.6% and the Bank of Canada sees America’s GDP expanding 2.4%. Not great, but not terrible. So why all the negativity? Some of it surely comes from skepticism about the ability of economists to see the future. The IMF especially has a recent track record of overoptimism that has hurt the reputation of its economics department. Yet there is something pathological about the current spate of doomsaying. If you start the clock in 2007, we are nearing a decade of talking about the U.S. economy as either being on the verge of disaster, in the throes of the worst recession since the Great Depression, or stuck in an endless and disappointing recovery. (The U.S. actually recovered from the 2008-09 calamity in 2011, when GDP surpassed its pre-recession peak.) Turbulent stock markets and $30 oil are the latest reasons why the U.S. is headed off the rails, assuming, as Kirby’s source does, that it isn’t already in the ditch.
The early part of February will help clear the air on the state of the U.S. economy. There are a number of important indicators set for release, including the latest jobless data on February 5, and Fed Chair Janet Yellen will update Congress on the central bank’s outlook next week. One of those indicators, ADP Research Institute’s monthly payrolls survey, showed private employers added more than 200,000 jobs in January, more than the consensus estimate on Wall Street. The report is just the latest reason to doubt that the U.S. economy is seriously in trouble. To be sure, the stock market could be due for a correction; Robert Shiller, the Yale economics professor and Nobel laureate, has been warning for a while now that the ratio of price to earnings suggest a bubble. But that bubble has been inflated by an era of extraordinary monetary policy. The real economy only now is catching up to the equity markets. There is every reason to think that an economy that has created a significant number of jobs for 60 consecutive months can power through some stock-market volatility.
All those newly employed and no-longer-so-newly employed workers also should help the U.S. absorb whatever hurt comes from the stronger dollar. The currency’s surge in 2015 slowed exports, dealing a blow to manufacturing. But a smack is different than a knock-out punch. According to Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, less than a third of the 18 major U.S. manufacturing segments posted reduced output last year from 2014, and they accounted for only 20% of total factory production. Porcelli ran the numbers for every U.S. recession since 1973 and found that all occurred when at least 80% of manufacturing subgroups were in decline.
If manufacturing plays a role in the U.S. business cycle, it would seem the U.S. is safe from a recession. That’s because America still generate most of its demand at home. In a separate research note, Porcelli generated this chart:
That’s U.S. personal consumption graphed against spending on capital goods; one represents some 70% of GDP and the other represents about 4.5% of GDP. So while it’s true that weaker global demand and the stronger dollar is a headwind for big American manufacturing companies, hiring data suggest domestic consumption will continue to expand. “We care more about the lack of stresses for the near-70% slice of GDP known as “personal consumption” than we do about the 4.5% slice known as durable goods shipments,” Porcelli said. “But perhaps this is too practical.”
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