If there is a Recession in 2016!
MORE and more news headlines and stock market analysts' reports have started predicting, or at least insinuating, that a recession could be near in the United States. I've been skeptical; the economy may not be great, but I've had a hard time envisioning how economic turmoil in countries like China and Brazil and supercheap oil could somehow combine to drag down the mighty United States economy. That's why my October article on the economic outlook ended not with any bold conclusion, but with the "shruggie" emoticon.
But after thinking about it some more and talking with some people on the pessimistic end of the spectrum, I think I have a handle on how the economy could end up in a substantially worse place by the end of the year. Here's that narrative.What we're dealing with isn't just a run-ofthe-mill economic slowdown in emerging markets, but the reversal of a 15-year cycle in which capital has flowed into emerging markets year after year while debt grew. Now that's reversing, and we're seeing a version of Warren Buffett's maxim that "you only find out who is swimming naked when the tide goes out."
In other words, now that capital is going out rather than coming in, we're seeing just how much of the growth in Asia, Africa, Eastern Europe and Latin America since 2000 has been driven by a credit bubble and how much is real, durable economic activity. (Read my colleague Peter Eavis on the bad loans in question.)
This will put those countries' economies under pressure. Global investors will discover more poorly run companies and weak governmental structures than they had gen- erally assumed existed during the emerging markets boom, when an influx of foreign money masked those problems.
The steep drop in oil prices is both a cause and effect. For oil-producing countries (in the Middle East, certainly, but also the likes of Russia, Brazil, Mexico and Nigeria), falling oil prices mean a drop in revenue and a lot of stress on major oil companies. And the slowdown in economic activity across global emerging markets reduces demand for oil, creating a vicious cycle.
That isn't the only vicious cycle at work here. The weakening of emerging economies causes their currencies to fall relative to the dollar. Now that should help their exporters, but in the current moment it can make the debt crisis worse. Every tick the Chinese renminbi, the Indonesian rupiah or the Brazilian real goes down against the dollar makes it harder for the countries' companies to repay their debts. Then you get further retrenchment.
But our story of how the United States might fall into recession isn't done. Exports to these emerging economies are a small enough piece of overall American G.D.P. that it would take an all-out collapse to move the dial on United States growth. And the energy sector in the United States expanded a lot in the last few years, but oil and gas extraction still accounted for only 730,000 jobs in December, in an economy with 143 million of them. So in normal times, an emerging market panic, a drop in oil prices and a strengthening dollar shouldn't matter much for the United States. In 1998, for example, all of those things were happening, yet growth roared ahead in 1999. But if there's a recession in 2016, it will be because of two crucial differences in the economy.
First, the starting point for the United States and other advanced economies was much stronger then. From 1996 to 1998, the United States economy grew an average of 4.3 percent a year; from 2013 to 2015 the rate was less than half that, 2.1 percent. A much smaller hit to growth would be more likely to put us in recessionary territory now than in the late 1990s. That lower economic starting point could already be having some psychological impacts that slow growth. Perhaps the weak underlying condition of the United States economy is a reason consumers are largely putting their savings from lower energy prices into increased savings rather than buying stuff.