US recession risks rising but how likely an outcome?

By David Absolon, Investment Director at Heartwood Investment Management

When the Fed ended its zero interest rate policy in December, financial markets welcomed the move believing it to be a sign of confidence in the US economy.

Very quickly, however, sentiment has turned, and investors are now questioning whether the Fed’s policy move was a mistake, as markets discount an increasing risk of a US recession.

But we need to ask ourselves, has the US economy fundamentally changed since December?

In short, we do not believe this to be the case.

1) We have known for some time that the US manufacturing sector is suffering under the weight of slower global demand, commodity price declines and the impact of a strong US dollar. These trends are not going to disappear quickly, as the energy sector adjusts to lower oil prices, China rebalances and the lagged effect of currency strength continues.

Over the last month, manufacturing survey data has been less downbeat in aggregate. The Chicago PMI survey of activity bounced sharply into expansion in January and while other regional surveys underwhelmed, forward looking indicators across all of this data provided a few signs that the outlook is stabilising.

Despite all the chatter about tighter financial conditions in the US, it is worth highlighting that the US dollar has actually weakened this year on a trade-weighted basis, which may provide some welcome relief to exporters in the coming months.

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