The US Economy is 'Becoming More Vulnerable'
The risk of a US recession over a two- to three-year horizon has "increased materially," according to JPMorgan strategists led by Bruce Kasman.
In a note titled "Is it safe?" published in late December, the strategists said that 2016 is likely to see "pockets of stress," and that the US economic expansion is becoming "more vulnerable."
The JPMorgan strategists are not the first to highlight the increasing risks of a recession.
Some of the biggest names on Wall Street, including Leon Cooperman, Jeff Gundlach, and Fed Chair Janet Yellen, have discussed the topic in the past couple of weeks.
Meanwhile, Kasman's colleagues, JPMorgan economists Michael Feroli, Daniel Silver, Jesse Edgerton, and Robert Mellman,think there is a three-in-four chance that there will be a recession in the next three years.
But the JPMorgan note serves as a nice end-of-year roundup for the team's views, spanning global growth, emerging-market conditions, and the US economy.
Here is the key bit of the note (emphasis ours):
Our models suggest that US recession risks over a two- to three-year horizon have increased materially as a result of weak supply-side performance. US expansions don't die of old age, but an environment of tight labor markets amid weak productivity gains and limited global pricing power signals that the expansion is becoming more vulnerable.
The general tone from the rest of the note is to expect increased volatility through 2016, as central banks head in different directions.
One of the team's core views is that the growth gap between emerging markets and developed markets will close, with advanced economies benefiting from accommodative monetary policy and emerging markets suffering from a deleveraging cycle. That, they say, has the potential to be "disruptive."
The note said (emphasis ours):
Persistent wide business cycle divergences threaten financial instability in the global economy's weak links that could prove disruptive. However, we believe the most likely 2016 outcome is one where the global expansion moves forward in the face of pockets of stress. EM weakness will weigh on the global expansion, but the resilience of the US and Western Europe, combined with policy support in China, makes it likely that growth will remain bounded close to our 2.6% estimate of global potential growth in 2016.
The strategists add that they expect growth in China to stabilize, but that emerging-market economies in Latin America, Russia, and South Africa will still suffer from the slowdown. The note said (emphasis ours):
A significant credit tightening is expected in these EM economies, and risks are high that there will be a disruptive but localized credit event next year. We downplay the threat that a localized event broadens, partly because the US Fed is likely to remain highly sensitive to global financial market developments and also reflecting our assumptions about the course of policy in China. While our forecast incorporates four US rate hikes next year, the risk that global financial market volatility slows the Fed's path is high.