A post in August 2014 suggested that the US economy would be at risk of a recession in 2016-17, reflecting scheduled downturns in the Kitchin stockbuilding cycle and the Juglar business investment cycle. This possibility argued for the Federal Reserve raising interest rates sooner rather than later*.

The concern here about possible US economic weakness in 2016 was magnified by a slowdown in real narrow money from spring 2015, discussed in a post in October. In addition, the ratio of inventories to sales had moved above its long-run falling trend in early 2015, consistent with the scheduled peaking of the stockbuilding cycle.

Recent US economic news has been weaker than expected – the Citigroup surprise index has been in negative territory since November, with its current level close to a seven-month low. While consensus economic forecasts remain upbeat, markets are increasingly fearful that another recession is at hand.

Recent developments suggesting heightened recession risk include:

1)    Fourth-quarter GDP growth is tracking at just 0.6% at an annualised rate, according to the Atlanta Fed. The tracking estimate, moreover, is on a falling trend, implying that it could turn negative as additional information is incorporated.

2)    The ratio of business inventories to sales remained at its highest level since 2009 in November – see first chart. Firms have started to cut stock levels but may accelerate the process in early 2016, implying another weak or negative GDP print in the first quarter.


3)    Industrial output has fallen in 10 out of the last 12 months. As John Hussman notes, this has never been observed except in the context of a recession.

4)    The ISM manufacturing new orders index fell below 42.5 in the last six recessions. It stood at 49.2 in December but the equivalent index in the January New York Fed manufacturing survey was 38.2 – second chart.


These developments are worrying but a recession is not viewed here as the most likely scenario, for the following reasons:

a)    Real narrow money contracted before 10 of the last 11 recessions. The six-month rate of change fell to zero in October but recovered modestly in November / December – third chart.


b)    Industrial output weakness has been concentrated in mining and utilities. Manufacturing output fell in eight rather than 10 of the last 12 months. The increase in the rising months, moreover, was greater than the decline during falling months – output, therefore, was 0.8% higher in December than a year before.

c)    Consumer expectations fell sharply at the onset of previous recessions. The University of Michigan and Conference Board expectations measures are below their levels in early 2015 but only modestly, with the Michigan reading increasing in early January – fourth chart.


d)    Manufacturers in New York state are more exposed to Canadian competition, so the latest very weak survey may partly reflect the collapse in the Canadian dollar. The Philadelphia Fed survey may be a better guide to the national picture – January results are due on Thursday.

e)    The spread of corporate B-rated bonds over Treasuries surged through 700 basis points (bp) at the onset of the last three recessions – fifth chart. The current spread is 650 bp, with part of the recent rise due to a blow-out in the energy sector.


To summarise, recent developments validate the concerns here about US economic weakness but a scenario of stagnation / slow growth is more likely than a recession, based on current evidence.

*To quote from the post, ”If the Fed believes that a higher level of interest rates is necessary for medium-term inflation control reasons, there is a case for it making the adjustment by mid-2015 at the latest, while the Kitchin cycle is still in an upswing.”