Does the New Year’s market slide presage recession in 2016? That’ll be the chatter of this week, as analysts try to make sense of the wreckage. The majority of economists don’t see recession in the cards. But the majority of economists are usually wrong.
So let’s tally the tea leaves. First, some good news:
- The stock market is a notoriously unreliable recession predictor. As economist Paul Samuelson once famously quipped, the markets have “predicted nine of the last five recessions.”
- The fundamentals of the U.S. economy are good. It’s not just that U.S. employers added 292,000 jobs in December – that’s a lagging indicator - but rather that evidence of “overheating” in wage growth or consumer prices is barely existent.
- The world’s second largest economy may be in serious trouble, but its impact on the U.S. is still small. U.S. exports to China last year were less than 1% of GDP.
The bad news?
- The expansion is getting old – six and a half years. The average expansion since World War II lasted less than five years. In recent times, they’ve been longer, but the last three still averaged less than eight years.
- The economics of oil in the U.S. have reversed. Not long ago, rising oil prices caused recessions. But Donald Luskin argues that this time, falling oil prices may precipitate the recession. A Morgan Stanley analyst says oil prices could fall as low as $20 a barrel.
- Despite our low exports, the impact of China in the global economy is larger than ever before. As a result, says former Treasury Secretary Lawrence Summers, the “global risk to domestic economic performance in the U.S., Europe and many emerging markets is as great as at any time I can remember.”
Economists like to say economic expansions don’t die of old age, but are killed by bad policy. If you believe that, there’s reason to be optimistic. The likelihood that Fed Chief Janet Yellen, a notorious dove, will raise interest rates too rapidly this year are small.
But if history is your guide, it’s time to prepare. The odds of a recession in 2016 may be less than 50%, but not by much. And in 2017, the odds shift.
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