For some more bearish economists and investors worries over rising rates and China’s slowdown could tip the world’s leading economy into recession, but Woolnough is unconvinced by such claims.
“The US economy is not heading for recession, as it’s not firing on all cylinders,” Woolnough said in a blog post. “There is currently a lot of concern regarding the US economy and its ability to withstand the collapsing price of oil and mined commodities, the Chinese slowdown, and the recent quarter point rate rise – or given the current market mood, its ability to cope with a doubling of the Fed funds rate.”
“Whilst high yield spreads are close to recessionary levels, this is skewed by the energy sector,” he continued. “The manufacturing side of the economy is in clear decline, but the services sector is more significant for US growth and is performing much better, although the non-manufacturing ISM is well off its recent highs. The US yield curve is some way from being inverted, which has historically signalled recession, although it has been flattening and needs to be steeper. We think the Fed remains on track to continue raising rates as it should be focused on the data that points to a strengthening labour market.”
Many of the danger signs that typically point to an impending recession are not present, Woolnough noted.
“If the outlook from an economic and industrial output perspective were grim then companies would be shedding labour in the most traditional manner, by firing people,” he said. “If the US economy was going to be pushed into recession then surely we would have had some signs by now, because oil has been in a bear market for more than a year, the Chinese stock market in a bear market for nine months, the mined commodity market in a bear market for two years, and the minor move in rates was fully anticipated, and delayed.”
