America’s economy is not in a recession, but fears of one are growing fast.
The chance of the U.S. sinking into a full-blown recession now stand at 18%, according to a CNNMoney survey of economists this week.
That’s nearly double what the nation’s top economic policymaker predicted only a month ago.
She has said repeatedly that she thinks a recession is not on the horizon. The U.S. has enjoyed two years of incredibly strong years of job growth — the best since 1999 — and the economy is expanding at a healthy pace of around 2% a year.
“There are plenty of things to worry about in the world, but the health and ongoing strength of the U.S. economy is not one of them,” says James Smith of EconForecaster.com.
But the risks are rising, and the pessimists are getting bolder in their predictions.
The stock market is off to its worst start ever to a year. China’s stock market is tanking again, pulling much of Europe and Asia into bear market territory. While it’s clear that China’s economy is slowing down, no one is certain just how bad it is. Chinese data is questionable, and the country’s head statistician is now under investigation for possible corruption.
While the U.S. remains healthy for now, to paraphrase John Donne, “no economy is and island” anymore. There’s a spillover effect.
American stocks plunged into correction (a 10% drop) this month as investors don’t see how U.S. companies can continue to grow a lot when China and so many emerging markets are having issues.
Citigroup predicted a 65% chance of a U.S. recession, a call that was so eyebrow raising that Yellen herself felt the need to swat it away, calling it “absolutely” wrong.
The stock market almost never leads the economy into a recession. It’s usually the other way around.
“The equity market has completely divorced itself from U.S. economic fundamentals,” says Bernard Baumohl, chief economist at The Economic Outlook Group. “Low interest rates, cheap oil prices, and the lowest input costs ever for business are not — and never will be — the precursors of recession.”
Nearly all the experts say the key is the American consumer. As long as people keep spending, the U.S. — and the world — should pull through.
But there are warning signs even beyond the stock market.
“The manufacturing sector is already in recession,” says Brett Ryan, chief economist at Deutsche Bank. Ryan and many economists told CNNMoney they are watching claims for unemployment benefits closely as an indicator that the strain is moving beyond manufacturing and into other parts of the economy.
Beyond jobs, Ryan is also watching car sales, tax receipts and loans (specifically the Fed’s senior loan officer survey). So far, everything other than manufacturing still looks solid.
The Fed’s modest interest rate hike was supposed to be a vote of confidence that the U.S. economy had finally put the Great Recession behind it and was back on solid footing. But now Washington, Wall Street and Main Street question if that optimism is far too rosy.
The Fed predicts four more rate hikes in 2016. Investors now think that’s far-fetched and will be watching the central bank’s statement closely on Wednesday for signs the Fed is “on hold” again.
“It’s no leap to say the four rate hikes envisioned by the Fed this year seem increasingly implausible,” wrote Morgan Stanley in a recent report. “Stall speed in the U.S., or even a shift to a lower channel of growth, would likely halt the Fed in its tracks.”