As recently as August, some models predicted a fifty-fifty chance of a U.S. recession in the next year. Now many top Wall Street firms are telling clients the risk of a recession in the next year is modest. Goldman Sachs puts the risk level at 24 percent. Barclays says less than 10 percent. Morgan Stanley says “around 20” percent.
“Our view [is] that the risk of recession remains moderate,” wrote Jan Hatzius, Goldman’s chief economist, in a note last week.
The message from the markets, many experts, the latest economic data and top Federal Reserve officials is that recession risk has subsided.
“How likely is it that there’s a recession on the horizon? … I don’t see one being imminent, unless we talk ourselves into one,” said Tom Barkin, president of the Federal Reserve Bank of Richmond, in a speech Tuesday.
Like many, Barkin said he sees less risk now than he did at the end of the summer.
He pointed to slightly more optimistic news on U.S.-China trade negotiations and Brexit, which is the effort for the United Kingdom to withdraw from the European Union.
He also flagged the ongoing resilience of U.S. consumers, who have continued to spend even as businesses have dramatically scaled back in the face of political and trade uncertainty. Business investment has contracted for two straight quarters, a drag on growth now — and possibly in the future since spending on new technology and equipment typically spurs faster production for years to come.
While few outside the White House are predicting an economic surge heading into 2020, there is widespread relief that the economy is cooling but most indicators have stabilized this fall. And the pullback in business investment does not appear to be spilling over to consumers.
“I think there’s less despair” now, Barkin said in an interview after his speech. He contrasted that with August, when some business leaders were “desperately worried” in his district, which includes Maryland, the District of Columbia, North Carolina, South Carolina, Virginia and most of West Virginia.
“I do believe the news has gotten better. I wouldn’t go as far as to say we’ve gotten to ‘good,’" Barkin said. “I still think there is a strong sense of uncertainty as we head into the end of the year.”
Unlike many of the Fed’s top leaders, Barkin is not an economist or banker. He spent three decades at consulting firm McKinsey, rising to be chief financial officer of the company before becoming Richmond Fed president last year. He notes this is a critical time of year when business leaders and owners make decisions about next year. They finalize budgets that include how much they plan to spend on major investments, employee head count and purchases of everything from huge equipment to pens.
The mood Barkin and others are hearing is wait-and-see. Executives are waiting to see what happens with President Trump’s trade talks with China. They are waiting to see if hiring remains as robust as the last jobs report on Friday implied, with 128,000 jobs added and gains across almost every sector. And they are waiting to see if American consumers keep spending this holiday season.
The Fed is also in wait-and-see mode after cutting the benchmark interest rate for the third time last week to just shy of 1.75 percent. Fed Chair Jerome H. Powell indicated that he thinks the central bank has provided “meaningful” stimulus to the economy since it began cutting rates in late July and that “monetary policy is in a good place.”
Barkin says most business leaders he talks to are aiming for “single-digit kind of growth,” which alleviates a lot of concern that companies would start slashing more and laying people off. But it also is not the kind of budgeting that shows a lot of optimism.
“Nobody is building a new plant in a world where you don’t know what the trade terms are going to be,” Barkin said. “They tell me they’re not scaling back yet, but they’re reluctant to double down.”
New data released Tuesday from the Labor Department shows the U.S. economy has more than 7 million job openings — or 1.1 million more job openings than unemployed people — an indication that companies are still confident enough that the economy is going to keep growing that they want to hire.
But the data also offered a warning: Job openings appear to have peaked in November of last year. In the past year alone, the number of job openings in the United States is down by 368,000, a seeming indication that companies are starting to pull back.
Manufacturing and agriculture have been hit hard by Trump’s trade war and are showing the clearest signs of struggle. Manufacturing still appears to be contracting, according to the latest Institute for Supply Management survey, but the latest read for October was at least a little bit better than September. Meanwhile, the service sector continues to show healthy growth, even beating expectations, according to the latest ISM survey released Tuesday.
Experts have also been relieved to see a bit more optimism in the bond market. The widely watched 10-year U.S. Treasury bond was about 3.2 percent a year ago and then fell below 1.5 percent at the end of August, a dramatic downward movement that indicated just how much fear there was about U.S. growth sinking quickly. On Tuesday, the popular bond had a yield of about 1.86, another signal of the modest improvement.
“It’s comforting to see yields move back up,” said Kristina Hooper, chief global market strategist at Invesco, an investment firm. “We don’t expect a recession in the next year. We do expect a slowdown.”