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The Case Against a U.S. Recession

Summary:
The National Bureau for Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” And the question of the hour: Has the United States entered a recession? If not, is it about to? To both questions, Credit Suisse answers no. The bank’s Global Market economists expect the U.S. economy to grow by 2 percent in 2016.   The employment picture provides the most compelling argument against a recession. The four-week moving average of weekly jobless claims fell by 8,000 to 273,000 in mid-February, the lowest level since November. The unemployment rate, meanwhile, dipped to 4.9 percent in January, after holding steady at around 5 percent for three months, while average hourly earnings rose 0.5 percent. The retail and leisure and hospitality industries, in particular, enjoyed strong job growth. “While we may not be there yet, this is the sort of [monthly employment] report we would expect once the economy reaches full employment,” says Jeremy Schwartz, of Credit Suisse’s Global Strategy and Economics team.   The U.S. economy has certainly shown signs of stress in the mining and energy sectors, which are struggling with declining oil and commodity prices. A handful of U.S.

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The Case Against a U.S. Recession

The National Bureau for Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” And the question of the hour: Has the United States entered a recession? If not, is it about to? To both questions, Credit Suisse answers no. The bank’s Global Market economists expect the U.S. economy to grow by 2 percent in 2016.

 

The employment picture provides the most compelling argument against a recession. The four-week moving average of weekly jobless claims fell by 8,000 to 273,000 in mid-February, the lowest level since November. The unemployment rate, meanwhile, dipped to 4.9 percent in January, after holding steady at around 5 percent for three months, while average hourly earnings rose 0.5 percent. The retail and leisure and hospitality industries, in particular, enjoyed strong job growth. “While we may not be there yet, this is the sort of [monthly employment] report we would expect once the economy reaches full employment,” says Jeremy Schwartz, of Credit Suisse’s Global Strategy and Economics team.

 

The U.S. economy has certainly shown signs of stress in the mining and energy sectors, which are struggling with declining oil and commodity prices. A handful of U.S. states where mining and drilling have large footprints – such as Alaska, North Dakota and Louisiana – have seen their economic activity decline, according to data from the Federal Reserve Bank of Philadelphia. The weakness in the mining and energy sectors has also had knock-on effects on manufacturing, as firms reduce spending on capital equipment used for oil and gas exploration and drilling. Overall, eight of 23 subcomponents of U.S. industrial production have contracted in the last 12 months.

 

The Case Against a U.S. Recession

 

With respect to state economic activity, however, the broader picture is brighter. During recessions, most state economies typically contract. In the last three months of 2015, by contrast, the economies of 40 U.S. states have actually expanded. On the manufacturing front, the purchasing managers index (PMI) has been below 50 since September, but its crucial “new orders” component rose to 51.5 in January, indicating positive growth. “The U.S. is clearly being affected by global weakness, but we expect decent domestic demand growth to prevent a sharp contraction in production,” say the bank’s analysts.

 

The risk of a recession in 2016 isn’t zero. For starters, the risk aversion that has been roiling financial markets in 2016 could escalate enough to cause U.S. companies to cut back on hiring and investment. It’s also possible that the concentrated problems in energy-related businesses could infect the larger economy, particularly if defaults in the highly leveraged energy sector lead to tighter overall credit conditions. As for global headwinds, they will continue to buffet the U.S. economy, but Credit Suisse economists say that exports are too small a percentage of GDP for global woes to throw the economy into recession if domestic household incomes and spending remain healthy. In their view, it is more likely that none of the above scenarios will throw the economy off its modest growth track.

Alice Gomstyn
My career began in newspapers, with my byline appearing in The Boston Globe and The Providence Journal, among others. I started working in web journalism in 2008, reporting on business for ABC News and later founding the network’s parenting blog. I’m now a full-time business writer and editor.

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