Recession or Not? Economists Increasingly Divided

U.S. economists are increasingly split over whether or not the U.S. is headed into a recession. As in most cases within the divisive world of economic forecasts, your point of view depends a lot on the data you’re looking at.

If you’re looking at corporate earnings and stock market performance (especially in the first few weeks of 2016), then the U.S. appears to be hovering on the precipice of recession.  If you look at an array of domestic economic data, however, notably from U.S. labor markets, the U.S. economy continues to slowly gain strength.

Analysts at some of the biggest U.S. banks support the former view, while a majority of influential Federal Reserve policy makers are betting on the latter.

First a look at the former: the analysts predicting recession.

The past two earnings periods – the third and fourth quarters of 2015 -- have resulted in negative earnings growth for U.S. companies, a trend analysts at J.P. Morgan Chase (NYSE:JPM) say is a clear historic indicator of an imminent recession.

According to the research report, in the last 115 years, consecutive quarters of negative earnings growth have been followed by, or coincided with, a recession 81% of the time. The rest of the time -- the other 19% of consecutive quarterly earnings downturns – a recession was prevented only through some kind of monetary or fiscal stimulus.

“Absent a pickup in consumption and further weakening in the U.S. dollar, we continue to see rising risk of earnings recession in the U.S.,” the J.P. Morgan analysts wrote in a note released last week. “This suggests that in order to avoid the end of the current corporate profit cycle we may need a fresh injection of some form of stimulus.”

The only problem with that is that the Federal Reserve may be out of ammunition to target another sharp downturn. With interest rates barely above zero and the Fed saddled with a severely bloated balance sheet, the central bank’s ability to initiate further accommodative policies appears limited.

Meanwhile, companies may find it difficult to generate growth on their own, having chosen in recent years to return large amounts of capital to their shareholders through dividends or share buybacks.

At the other end of the spectrum are analysts who share the view of U.S. central bankers.

“Many FOMC members have in recent speeches dismissed market worries and said that up to this point there is not much sign of a negative impact,” said Torsten Sløk, Chief International Economist at Deutsche Bank Securities (NYSE:DB). “This view is confirmed by recent data for consumer spending and industrial production, and the data today for durable goods and jobless claims continues to suggest that the Fed is right and the market is wrong.

Sløk said it’s not just the Fed that supports the rosier view, the private sector macro community expects GDP growth between 2.0% and 2.5% for the coming six quarters, he said.

“The bottom line remains that after 19 months of falling oil and higher dollar there are so far no signs of the problems in energy and manufacturing and high yield pushing the broader economy into a recession,” the economist said.