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How close is the next US recession?

It’s now eight years since the last US recession in 2008, triggered by the US subprime mortgage crisis of 2007-2009 and which spread into the global “Great Recession”. And, there are concerns that another one might be on its way.

James Carrick, economist at asset manager Legal & General Investment Management (LGIM), has raised a “yellow card” warning of a coming US recession. He has identified a number of late cycle indicators – including tightening credit conditions and peaking corporate profits. In the run-up to the previous recession, as the contraction spread from the US to Britain, LGIM said its recession predictor was indeed “flashing red”, with a 95% risk of recession in the UK.

Looking ahead to 2017, there are signs that inflation could pick up which could create a dilemma for the Fed going forward. Falling profits, rising inflation and tighter lending conditions would eventually drag growth back and could result in the next US recession, noted Carrick. 

According to Carrick, current data still point to continued strong growth until Q1 2017. But lead indicators for credit conditions indicate a deteriorating credit cycle – meaning a US recession could arrive in 2018. 

Fed dilemma

So with the credit cycle turning and core inflation rising thanks to the tight labour market and a reduced drag from lower commodity prices, the Fed could end up facing a dilemma in 2017, said Carrick. 

Essentially, it’s a “damned if you do, damned if you don’t” situation. “This is the same problem central banks faced in 2007,” said Carrick. “If they hike rates, they would exacerbate the credit crunch; but if they leave rates unchanged, inflation would have got out of control.”

Ed Cowart, however, manager of the Nordea 1 – North American All Cap Fund, does not see a recession on the horizon just yet.

“Despite the potential for additional modest increases in short-term rates from the US Federal Reserve later this year, long-term interest rates will probably remain relatively low due to dormant inflation and low global bond yields,” he explained. 

tom@ybc.tv

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