Is a Recession Coming?

The last few days have reminded everyone how quickly markets can turn. In the space of barely a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.

There was no single catalyst for the recent selloff, but an underlying investor concern is whether the slowdown in China and other emerging markets will drag the United States into a recession. While I haven’t been overly bullish on U.S. growth, I believe this fear is overblown.

1. The United States is a relatively closed economy
Most U.S. economic activity, nearly 70% of it, comes from domestic consumption. While the country isn’t immune to external shocks, there needs to be a transmission mechanism, such as a spike in oil prices, to impact the domestic economy.

Though a strong dollar and weakness in China have had a negative impact on U.S. corporate earnings, neither has had a material impact on overall U.S. growth. In fact, some of the disruptions from overseas come with silver linings for U.S. consumption and growth: lower rates and cheaper oil.

2. Higher rates are unlikely to derail the recovery
Rates are falling, supporting the housing market. Given low inflation and falling inflation expectations, the Federal Reserve (Fed) is likely, at most, to execute a single rate hike this year. This is in contrast to how most recessions start, with the Fed moving too aggressively and rates rising too rapidly.

3. Cheaper oil is a positive for U.S. consumers
Though the U.S. now has a large domestic energy industry that is feeling the pain from lower oil and the U.S. consumer certainly faces many headwinds, cheaper gasoline should support U.S. consumption

4. There is little statistical evidence that the U.S. economy is slowing
Prior to the last recession there were several red flags signifying a recession ahead. According to Bloomberg data, leading indicators had been negative for nearly two years, new manufacturing orders slipped into contraction territory in January 2008 and the Chicago Fed National Activity Index (CFNAI), my preferred metric for forecasting near-term activity, had been consistently in negative territory for most of 2007 and all of 2008.

This time around, lower rates and cheaper gasoline help explain why the numbers look very different, as Bloomberg data show. The CFNAI actually hit a 7-month high in July, leading indicators are up roughly 4 percent year-over-year, and despite the slowdown in China, the new orders component of the U.S. ISM survey is 56.5, consistent with solid if uninspiring growth.

My cautiously optimistic view comes with two caveats. First, in today’s slow growth world, it won’t take much to knock the U.S. economy off of its trajectory. As we’ve seen in recent years, a cold winter is enough to cause at least a temporary contraction.

Second, it’s possible to have a bear market without a recession, though I don’t expect this to occur. But if international market volatility becomes severe enough, it could drag down U.S. stocks, even as the U.S. economy continues to grow.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

© BlackRock

© BlackRock

Read more commentaries by BlackRock  

Sponsored Content

Upcoming Webinars View All

July 19, 2022 at 02:00 PM EDT - 1.0 CE credit
Volatility and Current Opportunities in Municipals
July 20, 2022 at 02:00 PM EDT - 1.0 CE credit
Today’s Volatility and Where Commodities Fit in a Portfolio
July 26, 2022 at 02:00 PM EDT - 1.0 CE credit
The Case for Non-US Investing
August 02, 2022 at 01:00 PM EDT - 1.0 CE credit
How to Align Commission-Free Annuities with Client Needs
August 16, 2022 at 10:00 AM EDT - 1.0 CE credit
The Outlook for the Economy and Active Management – Vitaliy Katsenelson
August 16, 2022 at 12:20 PM EDT - 1.0 CE credit
How to Use Commission-Free Annuities to Protect and Grow AUM
August 16, 2022 at 01:30 PM EDT - 1.0 CE credit
Tackling restrictive Fed policy, inflation and a recessionary sentiment with Defined Outcome ETFs
August 16, 2022 at 02:40 PM EDT - 1.0 CE credit
Insuring Client Spending in Retirement with Portfolio Income Insurance
August 17, 2022 at 10:00 AM EDT - 1.0 CE credit
The Drivers of Economy Growth – Tyler Cowen
August 17, 2022 at 11:10 AM EDT - 1.0 CE credit
Insurance-Backed Line of Credit: An Innovative Way to Access Liquidity
August 17, 2022 at 12:20 PM EDT - 1.0 CE credit
IRAs: Goldmine or Minefield
August 17, 2022 at 01:30 PM EDT - 1.0 CE credit
A Step-by-Step Approach to Surprising and Delighting Your Clients
August 30, 2022 at 01:00 PM EDT - 1.0 CE credit
How to Get Started with Commission-Free Annuities
September 06, 2022 at 01:00 PM EDT - 1.0 CE credit
Annuity Foundations: Your Questions Answered