fbpx
March 22, 2016 Reading Time: 3 minutes

(Editor’s note: This piece by our Bob Hughes originally appeared as an op-ed in Columbus Business First on Friday. It is reprinted here with permission. Copyright 2016 Columbus Business First.)

The economic outlook is modestly upbeat, but rife with risks. As we approach the seventh anniversary of the end of the worst recession since the Great Depression, the economy has made substantial progress. There are reasons to believe that later this year businesses could feel more confidence in hiring and making other investments. But obstacles remain.

First, let’s look at the economy right now. On the positive side, the labor market has made substantial progress recovering from the severe job losses in 2008 and 2009. The unemployment rate is below 5 percent, and net job creation has averaged over 200,000 per month for the past five years. In addition, employers are trying to fill more than 5.5 million open positions across the country. Despite the progress, gains in hourly earnings remain modest.

On the negative side, the U.S. dollar has appreciated against most currencies, making our exports more expensive and imports cheaper, both of which are bad for U.S. manufacturers, though cheaper imports generally benefit consumers by keeping prices low. An additional drag is that economic growth in many countries around the world remains subpar, further depressing demand for U.S. exports. The collapse in commodity prices, particularly energy, is a double-edged sword for the overall economy.  Lower energy prices are helpful to consumers and some industries (think, transportation and shipping), but have hurt the domestic energy production industry.

With that basic backdrop, the policy makers at the Federal Reserve have begun raising short-term interest rates. Signals from the Federal Open Market Committee (FOMC, the group responsible for setting monetary policy) suggest further rate increases will come, though at an extremely slow pace given the shaky economic backdrop and benign outlook for inflation.

How do these trends translate to an outlook for the second half of 2016? Overall, not too badly. The U.S. economy is still driven by the consumer.  The slowly improving labor market, combined with lower energy prices and improved household balance sheets, provide a solid foundation for consumers to continue spending.

A reasonably healthy consumer combined with low interest rates should help support activity in the housing market, particularly as the important spring and summer selling season approaches. If consumers do push ahead with spending and home purchases, that will likely give confidence to businesses to continue hiring and boost investment, sustaining a virtuous cycle to keep the economy growing.

That’s the optimistic outlook, and in our view, the likely path. However, any number of things could turn the virtuous cycle into a vicious cycle.

The latest reading from our Business Cycle Conditions model suggests a note of caution. The Leaders Index – our compilation of economic indicators that help forecast the health of the economy – had a value of 50 (on a scale of 0 to 100) in the latest month, exactly neutral. Generally, persistent readings below 50 would indicate an increased probability of recession in the next 6 to 12 months. So, according to our model, while we don’t expect a recession in the immediate future, the economy is somewhat vulnerable.

There are a number of factors that could make an impact in such a state of vulnerability. For instance, the Fed could raise rates too quickly. Consumers could lose confidence and slow spending, or businesses could lose confidence and slow or stop hiring, or cut back on investment. We could be faced with an unforeseen geopolitical event. If one or some combination of these occur, it could tip our model and the economy into a new recession.

There is always some ebb and flow to economic activity, and when those ebbs and flows happen while overall growth is modest, the risk of a recession can rise. The economy becomes more vulnerable, policy decisions become more important, and the potential impact of some shock to the system becomes magnified.

No one knows for sure what the future holds, but the U.S. economy, led by the U.S. consumer, has proven resilient during previous periods of slow growth and uncertainty. Our view is that during the remainder of 2016, we will see continued economic expansion led by consumer spending, housing and business investment. But, as our model suggests, it is a close call.

Click here to sign up for the Daily Economy weekly digest!

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

Get notified of new articles from Robert Hughes and AIER.
AIER - American Institute for Economic Research

250 Division Street | PO Box 1000
Great Barrington, MA 01230-1000

Contact AIER
Telephone: 1-888-528-1216 | Fax: 1-413-528-0103

Press and other media outlets contact
888-528-1216
[email protected]

Editorial Policy

This work is licensed under a 
Creative Commons Attribution 4.0 International License,
except where copyright is otherwise reserved.

© 2021 American Institute for Economic Research
Privacy Policy

AIER is a 501(c)(3) Nonprofit
registered in the US under EIN: 04-2121305