No, the Economy Isn’t Plunging Into a Recession
The S&P 500 got off to one of its worst starts in history this year. While many are preparing for another significant economic downturn, at this time, we do not believe current economic factors are pointing toward a recession in 2016.
To start, the labor market represents one particularly bright area of the economy. In January, the unemployment rate dropped below 5 percent for the first time in eight years and the manufacturing sector added 29,000 jobs after seeing little change in 2015. After the strong non-farm jobs report of December 2015 (+262,000), the January slowdown (+151,000) concerned some investors. However, we view these fears as overblown given that a slower pace is to be expected this time of year due to seasonal adjustments. Non-manufacturing segments of the economy are still growing at a moderate pace.
Also, the consumer, which represents about 70 percent of the U.S. economy, is very healthy right now. The consumer has been the main driver of domestic growth, aided by a strong labor market, low interest rates, lower energy costs and subdued inflation.
Personal Consumption Expenditures (PCE), the primary measure of consumer spending on goods and services in the U.S., demonstrated solid growth in its most recent report. Individuals were devastated by the 2008-2009 recession. But since then, the U.S. consumer has reduced household debt and grew their net worth, aided by a recovery in both the financial and housing markets.
Wages also grew significantly in January, and low gas prices are giving American workers more excess cash than they’ve had in years. Consumers may be deploying some of this extra capital, as the beneficiaries have been selected areas of the retail sector, including housing related goods.
There are clearly a number of negative trends in the economy that we believe are worthy of monitoring. Without a doubt, the severe decline in oil prices, while having positive implications for U.S. consumers as noted above, has also negatively affected various sectors of the global economy. For example, employment and capital spending tied to the energy sector have been adversely impacted, as well as sovereign nations highly dependent on oil revenue to support infrastructure spending. We agree with the views expressed by many in the investment community that the latter issue has prompted selling in liquid financial markets, such as U.S. equities. But at this juncture, we have not seen a decline in energy demand on a global basis. We believe the fall in oil prices is more supply-driven due to increased production in the U.S. and other nations, as well as a lack of coordinated supply cuts from OPEC, and does not appear to be a likely trigger of the next economic recession.
Several general indicators of economic health demonstrating GDP expansion, which officially began in June 2009, remain intact. The growth rate during this expansionary phase has been somewhat tepid relative to prior periods of economic growth and recent releases of economic data point to at least a softening in demand. But it’s important to note that the U.S. economy experienced “growth scares” like these on multiple occasions throughout the past several years, and such events did not lead to a recession.
The debate as to the timing of the next recession, whether it be in 2016, 2017 or beyond, will continue and be driven by economic data in the U.S. and abroad, as well as by the price action and volatility of the global financial and commodity markets.
The clear message of the last several months is that global markets are in the process of re-pricing growth and that the risk of recession, or at least slow growth, regardless of the timing, have been elevated. However, given the improving labor market, the strength of the consumer and the nature of the oil price decline, we do not see a U.S. recession on the horizon in 2016 at this time.
Ernie Cecilia is chief investment officer at Bryn Mawr Trust. Ernie has over 35 years of experience in the investment management industry and directs investment policies, manages client portfolios, and leads a team of analysts responsible for market research, manager selection and portfolio management strategies.
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