Potential for Recession on the Horizon?

October 10th, 2015 by

The recession is over! Right?

Well, in the opinion of a group of leading economists, the odds that the U.S. again plunges into recession in the near future is on the rise.

But I thought New York Fed President Bill Dudley was just on CNBC this afternoon telling us all how strong the domestic economy is? The former chief economist at Goldman Sachs (NYSE:GS) conveniently downplayed the impact of economic slowdown in China and other emerging markets as a potential roadblock to a full recovery. He must’ve slept through the FOMC meeting last month.

Recession. Source: Bloomberg

Source: Bloomberg

A Bloomberg panel of economists revised their consensus odds for a dip back into recession in the next year up to 15%, the highest average response for the survey since 2013. Citigroup analysts second this prediction, agreeing that the chances of another recession in the near-term are going up.

Remember the Real Economy?

Although stagnant wages and virtually non-existent inflation have been stubborn signs that a full-fledged economic recovery has not taken hold, these are only symptoms of the economy’s health. What underlying reasons have been given for why we ought to be more worried about a possible recession?

One overarching factor is the addiction-like reliance upon unconventional, easy-credit monetary policies by central banks. To date, these years-long attempts at heating up sluggish economies in the developed world have, at best, yielded minimal results.

moneymanIn lieu of “QE4” (shorthand for yet another round of quantitative easing by the Federal Reserve) and simply more of the same medicine that doesn’t seem to be curing what ails the economy, governments in developed economies may finally be warming up to more orthodox methods. For instance, they’re again addressing the notion that rather than goosing the economy by pumping it flush with easy money, any new spending (or money-printing, however you’d like to look at it) ought to go toward the real economy—you know, the one where things actually get built and manufactured, instead of shuffling digital numbers around on computer terminals?

I know, sometimes it’s difficult to remember what the real economy is when the media would like us to believe in never-ending financialization and QE-to-Infinity.

Infrastructure Ignored

The Bank of England and its governor, Mark Carney, may be the first to jump on this not-so-new idea. A newly-appointed National Infrastructure Commission will consider ways the U.K. government can best allocate money to new construction projects that are intended to boost economic growth, such as new railways that connect the country’s major population centers.

Proponents of fiscal responsibility (by and large) aren’t calling for zero federal spending, as some opponents like to suggest through Strawman arguments. Rather, smart and effective spending is the goal—as opposed to throwing ever-increasing amounts of money at problems that the funds won’t even begin to solve.

If the conservative Tory administration in Britain is taking such steps, maybe the U.S. ought to consider addressing its own broken highway system. IMF head Christine Lagarde has made similar calls for wealthy nations to consider investing in infrastructure.

Recession Risks in Europe

recessionECB President Mario Draghi, speaking at an IMF meeting, pointed out that the ongoing confusion and uncertainty in emerging markets is placing a greater risk of derailing the Eurozone’s tepid recovery from recession. It would make sense that the same goes for the U.S.

European stocks have actually advanced for 6 straight trading sessions as the euro bounced back from a 6-week low against the dollar.

Emerging markets like Brazil, which benefited so much from the way that China devoured commodities and natural resources during its (now fading) economic boom, have seen their developing economies sink back into the worst recession since the Great Depression.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.