Investment Clock insights

US recession fears look overdone


Ian Kernohan

18 January 2016

 

Big falls in share prices and some softer economic data have added to existing concerns about China and the state of the oil markets, leading to a spike in US recession talk.  While such talk seems to be an annual feature of markets (someone somewhere always seems to be predicting an imminent US recession), it is still remarkable, coming so soon after just one US Federal Reserve (Fed) hike and the latest set of strong payroll data; we recall Samuelson’s quip that “stock markets have predicted nine of the last five recessions”.  
Typically, US recessions are triggered by one of three things: Fed tightening, a major financial crisis which damages the banking sector, or a large spike in oil prices.  While the sensitivity of the economy to Fed rate increases may have risen post crisis, one 25bp rise would not nearly be enough to tip the economy over, especially since long rates, and therefore mortgage rates, have hardly budged.  Risks to the banking sector also look more contained, while far from a spike in oil prices, we’ve actually seen a collapse.
What about leading indicators of recession?  Neither trends in car sales, miles driven or jobless claims (see chart 1) are behaving as they usually do ahead of a recession.  Also, with the short end of the treasury market rallying in recent days, the yield curve remains far from inverted.  The curve is often cited as a good recession indicator (see chart 2), although as with many economic and financial indicators, the interpretation is more art than science.

Big falls in share prices and some softer economic data have added to existing concerns about China and the state of the oil markets, leading to a spike in US recession talk.  While such talk seems to be an annual feature of markets (someone somewhere always seems to be predicting an imminent US recession), it is still remarkable, coming so soon after just one US Federal Reserve (Fed) hike and the latest set of strong payroll data; we recall Samuelson’s quip that “stock markets have predicted nine of the last five recessions”.  

Typically, US recessions are triggered by one of three things: Fed tightening, a major financial crisis which damages the banking sector, or a large spike in oil prices. While the sensitivity of the economy to Fed rate increases may have risen post crisis, one 25bp rise would not nearly be enough to tip the economy over, especially since long rates, and therefore mortgage rates, have hardly budged. Risks to the banking sector also look more contained, while far from a spike in oil prices, we’ve actually seen a collapse.

What about leading indicators of recession? Neither trends in car sales, miles driven or jobless claims (see chart 1) are behaving as they usually do ahead of a recession. Also, with the short end of the treasury market rallying in recent days, the yield curve remains far from inverted. The curve is often cited as a good recession indicator (see chart 2), although as with many economic and financial indicators, the interpretation is more art than science.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High Yield spreads have risen, although as we saw in 2011, this isn’t always a good recession indicator.  At any rate, the spike is mainly energy related and even taking into account the hit from cheaper oil to those parts of the US economy which are most exposed, we still think lower oil prices are a net positive for the US economy, and an even larger positive for big net oil importers such as the eurozone.

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.