02/19/2016
Recession Fears? GDP Could Grow 3%

Recession Fears? GDP Could Grow 3%

As warnings of an imminent recession circulate among financial commentators, government officials and investors, a sizeable majority of forecasters remain quite optimistic about the health of the economy. Today we’ll look at the bear argument and tamper fears with some encouraging economic fundamentals.

The Bear Argument

If we’re in fact in the early stages of a recession, we can expect to see an extended contraction of economic output. The stock market would continue to fall, and credit spreads would continue to rise. The strong employment numbers—shown by a 4.9% jobless rate in January—would quickly rise to 6% or more. With all the speculation surrounding the current bear market, it’s worth mentioning that most economic fundamentals remain strong.

A More Optimistic Outlook

Barron’s predicts economic growth to run at an annual rate of 2.8% for the first half of 2016, and then accelerate to 3.2% to close out the year. This 3% prediction may seem overly optimistic, but it is based on a consensus prediction of 2.4% growth from 50 forecasters surveyed by Blue Chip Economic Indicators. The 10 most optimistic of these forecasters predict 3.1% growth. Forecasters don’t always get it right, but their predictions are supported by historic trends and strong economic fundamentals.

The Historical Perspective

To today’s investors, 3% annual GDP growth sounds unrealistic. However, since World War II, the U.S. has seen several periods of expansion of 4% or better. Weak economies abroad, a strong dollar, struggling small businesses, and the slow expansion of the labor force may temper optimism, but, once again, the fundamentals tell us that positive changes may be right around the corner. Employment gains and rising salaries drive capital investment, business growth, and a strong housing market.

If a recession is imminent, it will certainly fly in the face of history: the last six recessions were preceded by a spike in oil prices, not a drop as we’re seeing now. The current troubles in the U.S. economy are largely caused by the external factors we mentioned above, and Michael Lewis, the economics chief at Free Market, points out that not a single recession in the modern era has been caused by foreign economic troubles.

The Big Picture

If history is any guide, consumers are likely to pay the market back for the money they’ve saved from falling oil prices over the last year. Barron’s also expects oil prices to rebound to $55 a barrel before 2016 comes to a close, and this would give relief to a struggling energy sector and provide support for energy investors.

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