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Wall Street turmoil to bend, not break, economic expansion

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(Bloomberg) — The turmoil in financial markets may slow the U.S. economic expansion. But it probably won’t kill it.

While the threat of a downturn has risen, consumers and companies have the wherewithal to weather the turbulence in stocks and keep the economy afloat, economists say.

“The risk of a recession in 2016 is pretty low, certainly under 25 percent,” said David Hensley, director of global economics for JPMorgan Chase & Co. in New York. “I’m more worried about growth downshifting to 1 to 2 percent than I am about a recession.”

Federal Reserve Chair Janet Yellen and her colleagues suggested Wednesday that they might put off raising interest rates in March in response to the more uncertain economic outlook. The central bank increased rates in December for the first time in nine years.

Since hitting bottom in June 2009, the economy has withstood a series of shocks — a near collapse of the euro zone and a government shutdown in the U.S., to name but two — on its way to recording the fourth-longest expansion since the end of World War II. It’s also been the weakest, with gross domestic product climbing at a mere annual pace of 2.2 percent.

Slowdown Projected

Government figures Friday are forecast to show GDP growth decelerated in the final three months of 2015, to a 0.8 percent annualized rate, from 2 percent in the third quarter, according to the median projection of economists surveyed by Bloomberg. Behind the predicted slowdown: a sharp slackening in inventories by manufacturers and other businesses and a larger trade deficit.

So far this year through Wednesday, U.S. stock prices have fallen about 8 percent, wiping trillions of dollars off wealth. The steep drop in equities, coupled with a shake-out in the corporate-bond market, also has raised the cost of capital for companies, making it more expensive for them to expand.

Businesses are more vulnerable to succumbing to the shock from the markets than consumers, according to Hensley. That’s because companies also are being squeezed by rising labor costs and a general lack of pricing power, while households continue to benefit from a strong job market and falling gasoline prices.

The biggest risk is that a panic in the financial markets so unnerves consumers and companies that they slash spending, driving the economy into recession, said Joel Prakken, co- founder of St. Louis-based Macroeconomic Advisers LLC.  So far at least, Americans seem to be taking the stock- market rout in stride.

Not Panicking

“This is not the first time that I’ve seen a drop, sadly,” said Detroit native Lindsay Madden as she browsed through a Tesla Motors Inc. showroom in Washington. “So I am not in a panic, not fussing about it.”

Americans surveyed by the Conference Board this month seem similarly sanguine, with 34.6 percent expecting equity prices to decline over the coming year. While that’s up from 30.5 percent in December, it’s still below the 38.5 percent recorded in September, when financial markets were first spooked by developments in China.

Overall consumer confidence climbed in January to a three-month high, according to a sentiment index compiled by the New York-based private research group.

“The gains we’ve seen in employment, the declines in gas prices at the pump and increases in house prices are helping to offset the volatility in the financial markets,” said Lynn Franco, the Conference Board’s Director of Economic Indicators.

An extended bout of turbulence though could sour sentiment and cause consumers to become more cautious in their spending habits. Even before the recent fallout in financial markets, households were electing to take advantage of falling gasoline prices to boost savings.

Jobs Supreme

Franco though said that, in the end, the most important determinant of consumer confidence is the job market.

And on that score, the news is first rate. Payrolls expanded by more than 280,000 per month on average in the last quarter of 2015, the strongest three-month showing of the year.

Some economists, though, worry that the good times for workers won’t last if businesses decide to respond to the tumult in the stock and corporate-bond markets by retrenching.

Mixed Data

News on the economy was mixed today. On the plus side, the Labor Department reported that applications for unemployment benefits declined last week from a six-month high, indicating that firings remain low in spite of the financial volatility.

A separate report from the Commerce Department was more downbeat. Orders for business equipment fell in December by the most in 10 months, a sign companies were slashing capital investment even before the turmoil in global financial markets

Companies are under pressure to cut back because sales have been stagnant while their wage bill has been rising, said John Lonski, chief economist of Moody’s Capital Market Research Group in New York. Expenses per worker adjusted for productivity — so-called unit labor costs — increased 3 percent in the third quarter of 2015 from the same time a year earlier, the most since the first three months of 2014.

While economist Allen Sinai is also troubled by the lagging corporate earnings, he said that companies are “in super shape financially.”

Corporations had more than $1.9 trillion in cash and other liquid assets on their balance sheets as of Sept. 30, 2015, according to figures from the Federal Reserve.

Sinai, the chief executive officer of Decision Economics Inc. in New York, said the odds of what he called a “growth disappointment” had risen with the turmoil in the markets. But a recession still seems a remote possibility.

“Can the American consumer carry the day for the U.S. economy and rest of the world?” Sinai asked. “I say yes, it can. But I do worry about risks to some of the fundamentals that drive consumer spending.”

–With assistance from Tatiana Darie.

See also:

What the Fed will and won’t do this week

Are we headed for a recession?

Jobless claims in U.S. increased last week to a 6-month high


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