Almost out of nowhere, talk of recession has spread across the financial media. Blame it on the market getting off to its worst start ever this year, as the S&P 500 dropped 8% in the first two weeks of trading.
Investors are rattled by slowing economic growth in China and falling oil prices, and many analysts now seem to think there's a chance of a recession hitting the U.S. In a December report, Citigroup said there was a 65% chance of the U.S. plunging into recession this year, saying the bond yield curve could invert.
The call was so severe, that Fed Chairwoman Janet Yellen specifically rejected it in a hearing on Capitol Hill; but even she allowed a 10% chance of recession back in December, and a recent survey of economists indicated an 18% chance. While there's always the possibility of a recession, there are a number of signs that the U.S. economy is stronger than it's been in a long time, which would indicate little danger of the economy slipping into negative growth.
1. Job growth
The U.S. economy added 2.65 million jobs last year, the second-highest total since 1999. The unemployment rate has now fallen to 5%, less than half of what it was at the height of the financial crisis, and a level that most economists consider to be full employment. Wage growth has also finally picked up, rising 2.5% in December from the year before.
Other signs indicate the job market remains strong. Just a few months ago, initial unemployment claims, seen as a forward indicator of job growth, fell to a 42-year low, indicating that layoffs are lower than they've been in more than a generation. If there is a recession coming, employers certainly aren't behaving that way.
In another recent report, the number of unemployed people per job opening fell to a 10-year low, at just 1.5.
Rising unemployment is one of the first indicators of a recession; thus far, there are no signs showing the labor market slowing.
2. Auto sales
The year 2015 marked a new record in auto sales, eclipsing the old mark set in 2000, as 17.5 million vehicles were sold in the U.S last year. Auto sales are seen as a leading indicator of the economy, along with consumer spending, as they represent a significant and often discretionary purchase. The category itself makes up about 20% of retail spending.
The new record is largely a result of cheap gas, low interest rates, and an improving labor market and economy. As more people rejoin the labor force, the need for a vehicle goes up, as well as the ability to purchase one.
During the financial crisis, auto sales plunged, falling by more than a third from 2007 to 2009. While sales have been volatile during the last few months, there are no signs of a long-term slowdown on the horizon, and in fact, major automakers are boosting their guidance for 2016.
Ford Motor Company (NYSE:F) just reported record profit of $7.4 billion for 2015, and is projecting operating margin and earnings per share of equal to 2015 or better in 2016. General Motors (NYSE:GM), meanwhile, recently raised its dividend, increased it share buyback, and upped its guidance for 2016, indicating it sees auto sales continuing to grow this year.
3. Credit is improving
The average American credit score is now 695, its highest level in more than 10 years since the housing bubble came along and destroyed the credit of underwater homeowners. The number of Americans with FICO scores below 550 is at 12.5% compared to 14.6% 10 years ago, and the percentage of Americans with poor credit scores has fallen significantly and steadily since the recession.
Average household debt has also fallen about 20% since the depths of the recession as Americans spend their windfall from low gas prices on paying off credit car debt and other loans.
Credit quality at banks is also improving. Default rates and foreclosure continue to drop at the nation's banks, and charge-offs for bad loans are a fraction of what they were during the recession. Paying off debt and saving money will help Americans better weather a slowdown in the economy, should one come, making the likelihood of a recession smaller.
It's easy for investors to mix up the economy with the stock market, but the two are not the same. The pullback in stocks this year comes after several gains, making the market priced above its historical average. There's no such concern like this affecting the economy. Meanwhile, conditions like low oil prices cast uncertainty about the market, but are actually a net positive for American consumers, as savings at the pump counteract losses for energy companies.
There's always a chance that the economy could slow down, but the reality is that it hasn't been stronger this century. With the labor market, auto sales, and consumer credit all improving, economic growth should continue.