Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.
Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust.”
There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.
Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:
- Deceleration: Every classical business cycle slows before it contracts, so look for a pronounced slowdown first. While Q4 looked weak, there is ample evidence that there will be a recovery in Q1.
- Diffusion: The weakness must be widespread across industries. Outside of energy and manufacturing, activity in the rest of the economy appears to be OK
- Depth: Broad indicators such as employment, income, production and sales need to contract by at least 1.5 percent from their cyclical peaks.
- Duration: The NBER looks for a period of at least six months of contraction in the economy to be convinced that the episode was a recession
MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.
- DJIA: 16,640 up 1.5% on week, down 4.5% YTD
- S&P 500: 1948 up 1.6% on week, down 4.7% YTD
- NASDAQ: 4590 up 1.9% on week, down 8.3% YTD
- Russell 2000: 1037, up 2.7% on week, down 8.7% YTD
- 10-Year Treasury yield: 1.77% (from 1.61% a week ago)
- Apr Crude: $32.78, up 3.2% on week
- Apr Gold: $1,223, down 1% on week
- AAA Nat'l avg. for gallon of reg. gas: $1.74 (from $1.72 wk ago, $2.37 a year ago)
THE WEEK AHEAD:
9:45 Chicago PMI
Motor Vehicle Sales
9:45 PMI Manufacturing Index
10:00 ISM Mfg Survey
10:00 Construction Spending
8:15 ADP Private Jobs
8:30 Productivity and Costs
9:45 PMI Services Index
10:00 Factory Orders
10:00 ISM Non-Mfg Survey
8:30 Feb Employment Report