Why tumbling global markets haven't sparked a U.S. recession

WASHINGTON -- Last week's harrowing plunge in U.S. stocks -- fueled by economic fears about China and plummeting oil prices -- left investors anxious and alarmed.

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Some wondered if it signalled an approaching recession in the United States.

The answer, most analysts say, is no.

The American economy is expected to prove resilient and nimble enough to avoid serious damage, at least anytime soon. For all the economy's challenges, the job market is strong, home sales are solid and cheaper gasoline has allowed consumers to spend more on cars, restaurants and online shopping.

The companies that make up major stock indexes are far more vulnerable than the economy itself is to distress abroad: Companies in the Standard & Poor's 500 index derived 48 per cent of their revenue from abroad in 2014, up from 43 per cent in 2003.

By contrast, exports account for only about 13 per cent of the nation's gross domestic product -- the broadest gauge of economic output. That's one of the lowest such shares in the world. Exports to China equal just 1 per cent of GDP.

"While the U.S. economy's exposure to China is relatively small, the multinational companies that trade on the stock market are much more exposed," said Mark Zandi, chief economist at Moody's Analytics.

The S&P 500 sank 2.2 per cent Friday and has tumbled 8 per cent since the year began, deflated by expectations of even lower oil prices ahead and fears that China's once-explosive economy is slowing more than anyone had expected. On Friday, the Xinhua news agency reported that Chinese banks reduced loans last month from a year earlier.

It was the latest sign that China's economy continues to decelerate -- an ominous trend for U.S. companies, like heavy-equipment maker Caterpillar, that have significant business there. (Caterpillar shares shed 2.7 per cent Friday.)

"For many of these companies, the narrative behind their growth and earnings prospects is China," Zandi said. "If you throw that narrative out, investors get nervous."

The disconnect between the actual economy and the price of stocks isn't new. From the waning days of the Great Recession into the tepid recovery that followed, stocks managed to gradually rise despite persistently high unemployment and tepid economic growth. Now, the opposite seems true.

"Main Street is better, and Wall Street is suffering," said Jim Paulsen, chief investment strategist at Wells Capital.

The broadest gauges of the economy look fundamentally sound. GDP likely expanded 2.4 per cent last year, according to JP Morgan Chase. Zandi foresees its growth hitting 2.8 per cent in 2016 -- hardly spectacular but decent, especially at a time when many industrialized economies are struggling to grow at all.

The job market appears particularly robust. Employers added an average of 221,000 jobs a month during 2015 and 284,000 a month from October through December. The unemployment rate has sunk from 10 per cent in 2009 to 5 per cent, a level associated with a healthy economy.

Improved job security -- layoffs have slowed to exceptionally low levels -- has helped embolden many Americans to shop. Consumer spending, which drives about 70 per cent of U.S. economic activity, rose at an annual rate of more than 3 per cent in the spring and summer. Auto sales hit a record last year.

Not that the U.S. economy has been left unscathed by the weakness abroad. Partly because a stronger dollar has made their goods more expensive abroad, U.S. manufacturers are suffering.

Industrial production fell in December for a third straight month, the government said, and orders to factories dropped in November for the third time in four months. Last year, factories added just 30,000 jobs, the fewest since the recession year of 2009.

What's more, energy companies are reeling from sharply lower oil prices. And though falling oil prices have helped boost consumer spirits and encourage spending, they also helped slow the overall economy last year by causing energy companies to slash investment.

In addition, the Federal Reserve has signalled that it expects to further boost interest rates this year after raising them from record lows in December, and some fear it will move too fast. Fed hikes were considered a trigger for three of the past four recessions.

Economists don't entirely understand the links among the world's major economies. The International Monetary Fund has acknowledged surprise over just how much China's slowdown has hurt other countries in the developing world.

It's also possible that damage to the United States could prove worse than direct trade ties suggest. Wells Capital's Paulsen notes that small- and medium-sized U.S. companies supply the multinationals that do big business overseas. When exports falter, those companies can suffer in ways that don't show up in trade numbers.

Tumbling stock markets themselves can also cause economic damage, by making Americans who have money tied up in stocks feel poorer and less inclined to spend.

A month ago, Joel Naroff, president of Naroff Economic Advisors, predicted that the U.S economy would grow 3 per cent this year. Now he's considering cutting his forecast. He's not worried about the impact of economic weakness overseas. He's worried about the toll that falling stocks may take on consumer confidence.

Still, he doesn't think a recession is coming, no matter how scary the stock plunge of late.


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