Open­ing Re­marks

Talk of a down­turn is in the air, and the num­bers are squig­gly

Bloomberg Businessweek (North America) - - Contents - By Peter Coy

The bears say down, the bulls say up. The num­bers say ...

Peo­ple who or­di­nar­ily ig­nore eco­nomic fore­cast­ers are ea­ger for what­ever in­tel­li­gence they can glean. What’s grabbed their at­ten­tion is the Jan­uary plunge in the U.S. stock mar­ket((1)), the worst two-week start on record. If the bears are right, prof­its and eco­nomic growth in gen­eral are go­ing to be weak in 2016. Even if the bears are wrong, the drop is mak­ing in­vestors less will­ing to spend. No­body knows what’s go­ing to hap­pen next. “The fact that econ­o­mists have a par­tic­u­larly poor track record of call­ing turn­ing points in growth only adds to un­der­ly­ing anx­i­ety,” Joseph Lavorgna, chief U.S. econ­o­mist at Deutsche Bank Se­cu­ri­ties, wrote to clients on Jan. 19.

Weak­ness is em­a­nat­ing from China, where pes­simism has driven stock prices down 40 per­cent since June((2)), vs. a de­cline of 12 per­cent in the U.S. With trade de­clin­ing, there’s

been a sharp drop in the Baltic Dry In­dex((3), a mea­sure of cargo ship­ping rates. Oil prices((4)) are also down, re­flect­ing not just an in­crease in sup­ply but fall­ing de­mand. That’s bad for busi­nesses and work­ers in the U.S. oil patch.

One way trou­ble abroad gets trans­mit­ted to the U.S. is through a ris­ing dol­lar((5)). When other economies weaken, the world’s in­vestors flood into the U.S. in search of higher re­turns, buy­ing dol­lars as they do. The strong dol­lar is al­ready show­ing up in a de­cline in im­port prices((6))— bad news for U.S. com­pa­nies that com­pete with im­ports.

The Mor­gan Stan­ley Busi­ness Con­di­tions In­dex((7)) fell this month to its low­est level since Fe­bru­ary 2009. Ellen Zent­ner, Mor­gan Stan­ley’s chief U.S. econ­o­mist, head­lined her re­port, “Los­ing Faith.” Auto sales((8)), which had been climb­ing steadily for years, have fallen from their peak. Man­u­fac­tur­ers, more sen­si­tive to trou­ble abroad be­cause of their re­liance on ex­ports, have seen a sharp drop in their main in­dex of ac­tiv­ity((9)). The economies of more than 9 in 10 U.S. coun­ties still haven’t got­ten back to their pre­re­ces­sion peaks((10)). An­a­lysts es­ti­mate that prof­its of Stan­dard & Poor’s 500 com­pa­nies in the last quar­ter of 2015 had their big­gest drop from the year be­fore since 2009, ac­cord­ing to data col­lected by Bloomberg((11)).

While all this is go­ing on, the Fed­eral Re­serve has its

fin­ger on the in­ter­est rate trig­ger. The Fed­eral Open Mar­ket Com­mit­tee has al­ready raised the fed­eral funds rate tar­get once, to a range of a quar­ter per­cent to a half per­cent. The mid­point of the “dot plot” of Fed of­fi­cials’ fore­casts is for the fed­eral funds rate to reach 1.25 per­cent to 1.5 per­cent by the end of 2016((12)), a level that the bears think could stop the frag­ile U.S. ex­pan­sion.

There’s noth­ing frag­ile about this ex­pan­sion, an­swer the bulls. The econ­omy has cre­ated mil­lions of jobs since the last re­ces­sion((13)), in­clud­ing 292,000 in De­cem­ber. This is the long­est run of con­sec­u­tive monthly em­ploy­ment gains in records go­ing back to 1939. The U.S. Bureau of La­bor Sta­tis­tics tracks an in­dex of pay­rolls con­sist­ing of av­er­age hourly pay mul­ti­plied by av­er­age hours worked per week mul­ti­plied by the num­ber of work­ers((14)). It’s up one-third from six years ago. Pay­roll growth en­ables stronger con­sumer spend­ing, which feeds back into more job growth. The num­ber of open­ings has more than dou­bled since 2010, to bet­ter than 5 mil­lion((15)), in­di­cat­ing that the hir­ing ex­pan­sion has room to run. Sure, the pace of ini­tial fil­ings for

un­em­ploy­ment

in­sur­ance((16)) has picked up a bit, but it’s still far below its re­cent av­er­age.

The cheap oil that the bears worry about is good news for the bulls, be­cause lower gas prices((17) leave more money for peo­ple to spend on other things. Amer­i­cans have been pay­ing down debt, and their fi­nan­cial obli­ga­tions have been de­clin­ing as a share of their dis­pos­able in­come((18)). Con­sumer sen­ti­ment is close to its strong­est of this busi­ness cy­cle((19)). And there’s no hint of a burst­ing hous­ing bub­ble: True, con­struc­tion starts fell in De­cem­ber de­spite warm weather. But af­ford­abil­ity re­mains well above the worst lev­els of 2006 and 2007((20)).

The bot­tom line is that a 2016 re­ces­sion is un­likely. The Con­fer­ence Board’s in­dex of lead­ing eco­nomic in­di­ca­tors((21)) points to growth. Macroe­co­nomic Ad­vis­ers, a fore­cast­ing firm, ex­pects the econ­omy to bounce back from a very weak fourth quar­ter in

2015((22)). Par­tic­i­pants in the Fed­eral Re­serve Bank of Philadel­phia’s lat­est Sur­vey of Pro­fes­sional Fore­cast­ers see only a small chance of gross do­mes­tic prod­uct shrink­ing in any quar­ter this year((23)).

Then again, those sooth­say­ers weren’t pre­dict­ing a re­ces­sion at the start of 2008, ei­ther. They didn’t re­al­ize that one had al­ready be­gun. <BW>

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