US macro outlook – no recession in sight

While some might fear a recession, the current performance of the US economy does not suggest a downturn is imminent.

Capitol building
Source: Bloomberg

As the current economic expansion rolls on, fears of a recession are on the rise. Those who use calendars to guess the next move in data have become worried by the fact that the last US recession (defined as at least two consecutive quarters of negative growth) is now nearly nine years ago.

While it is impossible to predict the future, the current set of data points continue to suggest that the US economy will keep growing. As a bellwether for the global economy, the US remains the one to watch, even if its stock market has not rebounded to the degree seen in the UK and the eurozone. While it might be tempting to suggest recent US equity weakness is down to a stronger dollar, history suggests that there is no real correlation between the US dollar and US equity market performance:

We can start with the yield curve, since this has been much in the news of late. The yield curve is a graph of the 10-year Treasury yield minus the 2-year Treasury yield. Usually, the latter is higher than the former, but when this inverts, it has often signalled that a recession is near (in the following charts, the shaded grey area indicates a US recession). At present, despite fears that an inversion is imminent, such an event does not appear to be taking place:

Even if an inversion does take place, it does not mean that a recession follows immediately. It can take between 18 to 36 months for a recession to develop following a yield curve inversion.

Initial jobless claims are another useful indicator of the health of the US economy. During a recession, workers are laid off and claims rise. Since 2009, the number of Americans claiming for benefits has fallen to its lowest level in almost five decades. The four-week moving average smooths out the data, and shows that there is no sign of an increase in claims that might signify companies are laying off workers. Indeed, recent non-farm payrolls data suggests there is more ‘slack’ (i.e. spare capacity) in the US economy than previously thought, and that the number of claims will continue to fall:

As the above graph shows, claims start to rise about half a year before the next recession, so here too there is no sign of a real deterioration in data.

As US workers find more jobs, they can spend more. Retail sales data only goes back to 1992, but even so, it remains on a steady upward trend, hitting a new all-time high in March:

Here there are fewer inferences to be drawn from the data, but so long as consumers keep spending, the US economic outlook will remain bright, as consumer spending constitutes more than two-thirds of the economy.

US recessions have, on average, occurred every eight years. But the data can help give us an idea of whether the path of growth is higher or lower. On current evidence, a sustained downturn in growth seems unlikely.

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