Weak indicators and poor global outlook raise recession fears in the US

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The slump in oil prices and the fear of slowdown in China on the back of weak fundamentals have hit the US markets as well. US Markets have witnessed a lot of turmoil since the beginning of 2016. The Dow Jones Industrial Average dropped 8.3 per cent in the first two weeks, hitting the lowest level since September. Oil, on the other hand has dropped below $30 per barrel, the worst in 12 years.

    China’s markets have been very volatile ever since last summer when it experienced a stock market crashed. In 2016’s first week of trading, China was forced to suspend trading twice to stop avoid a market crash. It also devalued its currency twice in the first week causing markets everywhere to stumble. China’s Q4 GDP will be released tomorrow and markets are bracing themselves for another strong and undeniable sign of slowdown. El-Erian, a Bloomberg View columnist said “Investors that are used to have favorable fiscal policies will have to get used to” slower economic growth.

    Economic indicators highlight declining growth across sector

    Back home, the scenario has been far from impressive. Hurt by the strong dollar and continuous drop in oil price, the manufacturing sector growth has been declining steadily. The latest PMI figures, both ISM and Markit show that the sector has not been successful yet to post figures that would prompt recovery hopes. Market PMI data released yesterday showed US manufacturing activity in December decline to 51.2 from a preliminary reading of 51.3, touching the lowest reading recorded since October 2012. Markit feels "A near-stagnation in new business volumes was the main factor weighing on the headline index in December. Measured overall, new order levels expanded only fractionally and at the weakest pace since September 2009.” The Institute for Supply Management (ISM) manufacturing PMI also released yesterday revealed manufacturing in the US contracted in December. ISM's index came in at 48.2, lower than 48.6 recorded in November and also below the 49.0 estimated. ISM’s December's reading was the lowest since June 2009.

    $85.5 billion worth of inventory was noted to have been accumulated by businesses in the third quarter. The change in inventory from November subtracted 0.71 percentage point from third-quarter GDP growth, compared to the 0.59 percentage point estimated earlier. The appetite to restock was hit as inventories hit record high in the first half of the 2015. Imports in November advanced at a slightly faster pace than reported in the previous month causing the trade deficit to subtract 0.26 percentage point from GDP growth.

    U.S. retail sales declined in December. It fell 0.1 per cent thereby ending the weakest year since 2009. Sales grew just 2.1% in 2015 compared with a year earlier, marking the slowest increase in the six-year expansion. December’s retail sales data has once again raised concern about consumer spending which accounts for more than two-thirds of U.S. economic activity. Consumer spending grew at a 3.0 per cent rate in the third quarter.

    The average hourly earnings however dropped in December though the non-farm payroll surged in December. The labor force participation rate was at 62.6 per cent in December, which is a near four-decade low.

    Though the inflation rate had moved up slightly in November, it was far below the Fed’s target. In the minutes of the December meeting the FOMC members flagged the risks related to achieving inflation target. The minutes mentioned the “significant concern about still-low readings on actual inflation” as well as the “uncertainty and risks present in the inflation outlook,” the minutes said. The FOMC therefore felt the need to closely assess the progress of inflation to ensure inflation was rising in the expected manner. ‘In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal’, the minutes stated.

    The Commerce Department in its third GDP estimate released on 22nd December noted GDP grew at a 2.0 per cent annual pace, instead of the 2.1 per cent rate. The figure marked a sharp fall from the brisk 3.9 per cent pace registered in the April-June period. GDP is estimated to grow at a 2 per cent rate in the fourth quarter.

    Will the US be hit by recession?

    A slew of economic indicators released recently signify a decline in growth across sectors. The Fed has said it will raise rates four times this year. However it also mentioned that the subsequent rate hikes will be gradual and data dependent. Going by the present scenario four rate hikes looks a little impossible. With oil prices at multi year lows it is difficult for inflation to pick up any time soon. On the other hand, poor global economic outlook will continue to negatively impact the demand for goods and services. Dollar can be expected to stay strong in the coming days and exports will continue to decline.

    The poor figures posted by the economy might raise the concern whether US is entering recession. Citi Research analysts in December stated there was 65 per cent probability of the U.S. entering a new recession this year. Economist David Levy, chairman of The Jerome Levy Forecasting Center LLC via CBS said persistently weak global economic conditions will pull the U.S. into a recession by the third quarter. Couple of factors ranging from high household debt to smaller corporate profits have left Americans worried. The coming few months will be extremely crucial and the markets will closely watch the economy’s progress before confirming or suspending recession fears.
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