United States: up to now, risks of a recession remain limited…

For some weeks now, more and more commentators have argued that the US economy is heading into recession. The reasons put forward are manifold: the current recovery has already exceeded the average length of a “normal” cycle, stock markets have recently fallen sharply, yield spreads have widened, ISM indices have weakened (more recently even in the service sector), China could drag the US economy down...

Still, up to now, the US economy has proven quite resilient despite a strong appreciation of the dollar (since January 2014, the dollar has already appreciated by, cumulatively, 21%). The housing market has kept improving; the ISM composite index has fallen (but continues to point to positive growth); the retail sales growth remains rather elevated (with car sales higher than the 1997-2007 average); initial jobless claims are far from recessionary levels (chart 1); and the latest non-farm payrolls survey continues to point to a wage bill growing at 4.5%. With  inflation hovering around 0.7%, this leaves room for household spending increases.

But we shouldn’t be fooled: the US economy is far from being fully immune to a recession risk! The dollar could undergo another leg of appreciation in effective terms. Moreover, if the fall in the stock market continues, the negative wealth effect and a drop in consumer confidence could weigh on consumption (chart 2). With growth slowing down, firms will cut hiring and capex plans… finally pushing the US economy closer to recession territory.