Is Recession Imminent in 2016?

It has been a very difficult start to 2016 with the extreme volatility on Wall Street and worries that the global slow down is signaling the beginning of another recession. This time the noise around a slowing economy might have some inherent truth as the forces of an economic contraction are being felt worldwide.

Brazil, the shining star of financial growth just a few years ago, is now suffering through a severe recession and 10% inflation. Japan has moved in and out of recession over the past 24 months and China just had their worst year in the last fourteen. Nearly every country in the Euro Zone is either in recession or some other type of financial trouble with the exception of Germany.

The world economy is not healthy and the decline in Global GDP is having a severe impact in America. The rout in the price of oil which now sits below $30 a barrel is not just a result of oversupply but marks a global business retraction.

Our economic muscle has also been impacted by a strong dollar, spending declines and a worldwide recession have blunted demand overseas. In addition, Corporations began cutting costs and increased efforts to dramatically reduce inventory which has weighed on growth here at home. The outlook has been further dimmed by the recent stock market selloff.

One of the harbingers of recessions past is an accelerated decline in the spread between the short term U.S.  Treasury notes and the long term 10 year yields. If you look at the spread in February between the 2 year note and the 10 year Treasury yield, it now sits at .95%, which represents the shortest spread we have seen since early 2008. In past recessions, this yield curve has been a precursor of an approaching downturn.

With all this bad news, there are still many positive outcomes happening in America. One of the key economic indicators for a business retraction is the job market, and while this is considered a lagging indicator, the employment numbers do not in any way suggest a recession. Unemployment numbers were reported this week by the Commerce Department and the rate dropped in January to 4.9%, the lowest it has been since 2009.  Plus you need a majority of sectors in America to become risk adverse and to begin cutting back enough to cause a recession.

Here is another interesting trend that tends to counter the idea that recession is imminent in America, Manufacturing added more jobs in January than in any of the past twelve months. There are two other sectors that help us predict an economic slowdown and that is retail and hospitality, these require a consistently high level of consumer spending to create jobs and both increased hiring last quarter.

I think it also might be wise to understand that another 2008 style deflation and recession is less likely because banks are now better capitalized. The American public is also deleveraged from a credit perspective and as a result we witnessed a reasonable return of consumer spending in 2015.

So while threats of recession are real, there are other forces in the economy strong enough to keep the slow but steady growth we have experienced since 2009, moving in a positive direction.

Janet Yellen commented in her February testimony to Congress that the current global turmoil “could weigh on the outlook for economic activity and the labor market,” in the U.S.

And then like any good economist she said this, “Ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending,”

After seven years of slow but steady economic gains in America, we are now concerned about a contraction. Consensus among economists say it is possible but not imminent at this time.