New York, 29 Apr 2016
Soft headline data and growing discussion about systemic weakness in the US economy have some market commentators predicting a recession before the end of 2016.
But Macquarie analysts have reviewed 70 years of US data, and say nothing exists in the current pattern to suggest the country’s stable economic expansion will not continue for some time.
“We’re not currently seeing the imbalances that make a recession likely, which means the economic expansion may continue at least for the next 18 months and likely for the next two to three years,” Macquarie Securities North American economist David Doyle says.
Real GDP growth, at between two and two and a half per cent, may be modest, says Doyle, but the economy as a whole remains on an expansionary trajectory.
“Data overall has been encouraging. Consumer spending and housing related data has continued to moderately improve and show some growth over the past couple of months,” he says.
Macquarie’s analysis of recessionary periods since World War II – when standardized economic data were first introduced – reveals significant similarities to 1986 and 1998.
“As we’re seeing now, both years had periods of financial instability coupled with large oil price declines and supply shock, occurring in the context of a US economic expansion.”
“Now we’re seeing some of the data turn more positively, as it did in those two periods, it’s really validating our comparison of the present period and saying ‘this isn’t 2006 or 2007’.”
Real interest rates remain low, at -1.9 per cent, rising just 0.6 per centage points from a trough last year. In the past, pre-recessionary real interest rates increased to between plus one and three per cent, typically moving between three and five per centage points.
We’re not currently seeing the imbalances that make a recession likely which means the economic expansion may continue at least for the next 18 months, and likely for the next two to three years.
Weak figures on the business investment and manufacturing side of the economy have led to a growing belief among commentators that while a recession hasn’t happened yet, it is coming.
Doyle says there are two things making a recession unlikely. The first is that previously troubling manufacturing PMI figures have turned around in recent months. The second is that poor business investment data is not symptomatic of broad-based weakness in investment, but rather reflects trouble in one particular area: the energy sector.
“The work we have done has shown that investment weakness has been concentrated within the energy sector,” he says.
Headline numbers can send misleading signals about the broader market, he says, pointing to the $US90b drop in energy investment in 2015. That alone removed 0.5 per cent from nominal GDP growth, more than four per centage points from non-housing investment, and continues to affect 1Q16 figures.
Doyle is confident that once the drag from lower energy drilling activity and related investment eases, firmer trends in business investment data will emerge and with it, increased confidence in continued economic expansion.
Usual economic markers are also not currently fitting a recessionary pattern. Business investment as a share of GDP is relatively low, construction employment numbers as a share of total employment remain very low, and data shows the residential housing industry remains stable.
Historical pre-recession figures suggest residential housing investment as a share of GDP grows to nearly 4.8 per cent. Currently, it is at 3.5 per cent.
“Typically before a recession you see these figures become highly elevated, growing to outsized levels relative to the broader economy,” Doyle says.
“The current structural composition of the US economy, compared to previous periods, makes a 2016 recession highly unlikely.”
For a full copy of the report, ‘Fortress America; the durable expansion’, please contact your Macquarie representative.