{"id":1595,"date":"2016-03-03T14:49:02","date_gmt":"2016-03-03T13:49:02","guid":{"rendered":"https:\/\/lazardfreresgestion-tribune.com\/?p=1595\/?p=1595"},"modified":"2016-03-03T14:58:22","modified_gmt":"2016-03-03T13:58:22","slug":"the-us-economy-recession-or-soft-patch","status":"publish","type":"post","link":"https:\/\/latribune.lazardfreresgestion.fr\/en\/the-us-economy-recession-or-soft-patch\/","title":{"rendered":"The US economy: recession or soft patch?"},"content":{"rendered":"

A variety of fears have held the financial markets down in the past few months (see our note, <\/i>\u201c<\/i>Four <\/u><\/a><\/i>fears gripping markets<\/u><\/a><\/i>\u201d). Renewed concern about an upcoming US recession is one of them. The first activity data available for January \u2013 core retail sales up 0.6%, manufacturing up 0.5% and capital goods orders up sharply \u2013 suggest there is no short-term danger of a slump, but the preliminary PMI reading for February was disappointing enough to keep the issue very much on investors\u2019 <\/i>minds. Is <\/i>the US economy on the brink of a new recession? What warning signs, if any, do we have?<\/i><\/p>\n

 <\/p>\n

1. A fall in the ISM manufacturing index to below 50 does not equate with recession<\/strong><\/p>\n

On the one hand, it would certainly be a mistake to dismiss the signals sent out by the manufacturing sector on the grounds that it has only limited weight in the US economy. Although manufacturing accounts for just 15% of output, it accounts for nearly 30% of the volatility in US output growth (see Graph 1). That makes it a key sector to observe and underscores the importance of tracking the ISM (Institute for Supply Management) manufacturing index.<\/p>\n

On the other hand, history shows that the ISM manufacturing index \u2013 and its new orders component in particular \u2013 would have to fall to much lower levels to indicate that the odds of a recession are high. Those odds don\u2019t start to become significant until the index breaches the 45 mark (see Graph 2).<\/p>\n

\"grapheUSrecession1eng\"<\/p>\n

In addition to the absolute readings, changes in those readings should be watched closely. But even so, sharp drops in the ISM manufacturing index are not always followed by recession. That\u2019s because the manufacturing sector often has a shorter cycle than the economy as a whole. Several corrections in the ISM index can occur within a single phase of economic expansion (see Graph 3).<\/p>\n

Today\u2019s weak manufacturing data can be primarily attributed to two factors:<\/p>\n

1.Extensive inventory destocking in a number of sectors.<\/p>\n

2.The damping effect of lower oil prices on investment in extractive industries \u2013\u00a0largely in shale oil (see Graph 4).<\/p>\n

In both areas, we are probably closer to the end of the correction than to the beginning.<\/p>\n

\"grapheUSrecession2eng\"<\/p>\n

2.\u00a0What, if any, are the warning signs of recession?<\/strong><\/p>\n

Various arguments have been adduced in support of the claim that the US is heading for a recession:<\/p>\n

1.\u00a0The length of the current expansionary phase. This argument rests on the assumption that no economy can grow uninterruptedly and therefore concludes that \u2013 as the current expansion has far surpassed the usual duration of such phases \u2013 we should prepare for a recession. In a recent study that used the same methodology as that for calculating human mortality rates,(1) Glenn Rudebusch found that the historical record since World War II does not support the view that the probability of recession increases with the length of the recovery \u2013 whereas it did before the war. Reasons for that change include robust postwar growth in the less-volatile service sector and the government\u2019s increasing role in stabilising the economy, often through countercyclical measures.<\/p>\n

2. A slide in profits as a percentage of GDP. During relatively long expansionary phases (e.g., in the 1960s and the 1990s), profits start slipping midway through \u2013 that is, several years before the onset of recession (see Graph 6).<\/p>\n

So if neither a prolonged expansion nor declining profits brings growth to a halt, what does<\/i> cause recessions? Unfortunately, there are no open-and-shut explanations and the question continues to divide economists. Exogenous productivity shocks, financial shocks, rigidities in an economy, oil shocks, shifts in the expectations and preferences of economic agents due to extrinsic causes \u2013 there is no shortage of theories put forward to explain the cyclical nature of the economy, yet none of them has gained the upper hand so far.<\/p>\n

That suggests it might make more sense to take an empirical approach to forecasting recessions. A look at the various factors causing business cycle volatility reveals that the following four components of demand have a particularly strong influence on fluctuations in GDP:<\/p>\n