Recession Fears Escalate

The recent turmoil in global markets has wiped out about $4 trillion in value this year. It has also spurred a new round of recession calls. It’s been nearly seven years since the last recession and while there is a case to be that we might be due for one, the folks at Capital Economics note “Since 1960, the average period between recessions has been eight years in the U.S…so the current expansion is not particularly long in the tooth.” It’s also worth remembering the old joke line, “Markets have predicted nine out of the past five recessions.” Economists are trying to figure how to square the divergent signals. There is no doubt that the U.S. manufacturing and energy sectors are in a recession. But whether the other parts of the economy will join is unclear. Overall employment gains have been strong, housing just completed another solid year of recovery and consumers are happily sitting atop extra savings, due to the drop in oil. (It is estimated that households saved $120 billion on energy related products last year.)

But, there is a real concern that if oil resumes its downward slide, it could spark a contagion. So far the evidence is not there, though it may appear this week, when the first estimate of fourth quarter growth is released. The consensus estimate is for GDP to slow to 0.8 to 1 percent. That would mean that 2015 GDP was likely 2 percent, in line with all of the slow growth years of this recovery:

• 2010: +2.5%
• 2011: +1.6%
• 2012: +2.3%
• 2013: +2.2%
• 2014: +2.4%
• 2015 est: 2%

Sluggish growth combined with volatile markets will likely keep the Federal Reserve on the sidelines for this week’s FOMC meeting. Most expect that the central bank statement will acknowledge greater risks to financial stability and moderation in economic activity. Traders are hopeful that the Fed also provides a hint about the March meeting—and specifically that the bankers will not raise rates if current conditions persist.

Even if there is no explicit mention, many believe that the Fed showed its true colors at last September’s meeting, which followed a similar concern about global growth and violent moves in financial markets. At that meeting, the Fed said, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.” Sound familiar?

MARKETS: Markets ended the week on a positive note, but we are still down significantly since the start of the year. Energy markets showed signs of life in the last two trading sessions of the week, though we will only know if the bottom has been reached with the benefit of hindsight.

• DJIA: 16,093 up 0.7% on week, down 7.7% YTD
• S&P 500: 1907 up 1.4% on week, down 6.7% YTD
• NASDAQ: 4591 up 2.3% on week, down 8.3% YTD
• Russell 2000: 1020, up 1.3% on week, down 10.1% YTD
• 10-Year Treasury yield: 2.06% (from 2.04% a week ago)
• Mar Crude: $32.19, up 9.4% on week
• Feb Gold: $1,096.30, up 0.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.84 (from $1.91 wk ago, $2.04 a year ago)

THE WEEK AHEAD:

Mon 1/25:

Halliburton, Kimberly Clark, McDonald’s

10:30 Dallas Fed Manufacturing Survey

Tues 1/26:

DuPont, P&G, Apple

FOMC Policy Meeting begins

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 1/27:

Boeing, J&J

10:00 New Home Sales

2:00 FOMC Meeting Announcement

Thursday 1/28:

Caterpillar, Ford, Amazon.com, Visa

8:30 Durable Goods Orders

10:00 Pending Home Sales

Friday 1/29:

American Airlines, Abbvie, Honeywell, Chevron, MasterCard Colgate-Palmolive

8:30 Q4 GDP-first estimate (Q3=2%)

8:30 Employment Cost Index

9:45 Chicago PMI