Are Stocks Leading the U.S. Into a Recession?

With the dramatic stock market sell-off year-to-date, collapsing commodities prices, ongoing pressure on bond spreads (particularly for HY sector bonds) and uncertainty surrounding global growth (stemming primarily from China), investors are wondering whether the U.S. is headed for a recession. While recession cannot be ruled out, unless you have a crystal ball, it is worth taking a closer look at some of the recent economic data prints for more insight as to the health of the economy. Last Friday saw a stronger than expected retail sales print, with the control group increasing the most since May 2015 at 0.6% month/month versus an expectation of 0.3%, which was on top of an upward revision to the prior month of 0.3%. This is especially important and encouraging given that consumption represents around two-thirds of U.S. GDP. Initial jobless claims showed improvement as well last week, after trending up since October of last year. Two weeks ago, the non-farm payroll print disappointed at the headline level, but underlying details were more positive, with unemployment falling despite an increase in the participation rate, and with both hours worked and wage growth beating expectations. The current estimate for 1Q16 GDP from the Atlanta Fed’s Nowcast model is 2.7% quarter/quarter annualized growth, up from 2.5% earlier in the week (after the stronger retail sales print) and just over 1% at the beginning of the month. While financial market volatility can be unsettling, and while higher costs of capital mixed with uncertainty about future growth and policy can constrain capital plans for corporations, the fundamental data do not corroborate the growing concerns expressed by many market pundits that a recession is on the horizon. In conclusion, we believe that predictions for a recession do not match the current economic facts, but would caution against excessive optimism, as well, as we continue to expect only modest growth and inflation both domestically and globally for the full year 2016, which is generally in line with the pace of the last couple of years.

Sources: Bloomberg, WSJ, Atlanta Fed