One Chart to Help Alleviate Recession Concerns

The media continues to run stories about the increased likelihood of a U.S., and potentially a global, recession. They point to weakness in the price of oil, the slowing Chinese economy and divergent global monetary policy as sources of concern. And, they claim that they see recessionary concerns in economic data.

Frankly, we don’t see it. There are many early warning signs that economists look for when trying to predict a recession or economic slowdown. The health of jobs, income, spending, economic activity and credit spreads are among them. Currently, credit spreads (i.e., the difference between what a corporate bond yields versus what a government bond yields) are the main sign of concern that economists point to. When investors are nervous about a company’s ability to pay back its debt, the interest rates on the company’s debt go up thereby widening the credit spread. It is true that credit spreads have widened (i.e., increased) over the last six months, but this is mainly due to investor concerns over oil and gas companies’ ability to pay debt because of low energy prices. There isn’t widespread concern.

Most of the other leading economic data has been encouraging. The U.S. job market continues to expand, retail spending continues to grow and personal income continues to increase. One of the more encouraging data points we came across about the U.S. economy was the most recent estimate of Gross Domestic Product (GDP) for the first quarter of this year. GDP is not published until almost a month after a quarter end, but economists at the Federal Reserve of Atlanta developed a statistical model that uses all the most recent economic data to estimate the current quarter’s GDP growth.

Its current reading is impressive. As of Friday, February 12, the Atlanta Fed was estimating that first quarter 2016 GDP would be 2.7%. This is far from recessionary and, is now a faster rate of growth than most economists anticipated.

This latest reading from the Atlanta Fed should help ease concerns about a U.S. recession and, even more encouraging, it is a growth rate this is supportive of continued job growth and corporate earnings growth.