i3 - March/April 2016 - 45

Business

BY SHAWN G. DUBRAVAC, PHD, CFA

T H E EC O N O M I ST

2016
CTA EVENTS
CTA Winter Break
March 21-24
Park City, UT

THE RISK OF A
U.S. RECESSION

Technology & Standards
Spring Forum
April 5-7
La Jolla, CA

Jose Luis Pelaez, Inc./Corbis

he risk of a U.S. recession has been
percolating with increased intensity
since the beginning of the year. The
U.S. consumer has been bolstering the
economy, and more accurately the global
economy, for some 18 months. However,
growth in U.S. consumer spending slowed
in the fourth quarter of 2015, and the overall economy slowed precipitously.

Economic growth in the fourth quarter of 2015
was close to zero and remained muted through the
start of the New Year. Financial conditions worsened as we began 2016, with a weaker path for
equities, a stronger dollar further dampening U.S.
exports and higher risk spreads driven by greater
uncertainty. While employment gains and firming
income should buoy consumers, real and perceived
risks to the outlook weigh on the consumer psyche.
Although my probabilistic models currently suggest a low probability of a recession in the U.S. over
the next four quarters, the estimated probabilities
within these models tend to rise quickly. We are
closer to the next recession than the last one, and
that together with visible pressure in a number of
places like equity prices will continue to weigh on
sentiment and keep nerves jittery.
Given the swift growth decline and the resetting of growth expectations, the Federal Reserve
will likely delay interest rate tightening. However,
expectations implicit in the marketplace should
exert pressure on the yield curve, causing term
premia to shift up and the yield curve to flatten.
Typically, inverted yield curves accompany U.S. economic recessions. While we aren't yet in an inverted
yield curve environment, many will be watching
this metric in the year ahead.
Geopolitical risks also remain acute. Chinese
C TA . t e c h / i 3

Geopolitical risks also remain acute.
Chinese growth has slowed drastically and the
loss of momentum in the U.S. will exert further
pressure on growth in China.
growth has slowed drastically and the loss of
momentum in the U.S. will exert further pressure on growth in China. A steep decline in
Chinese equities has pulled global markets lower
in 2016. Moreover, great skepticism continues
to swirl around the true underlying growth in
China. As a result, uncertainty over how bad the
Chinese economy is remains. Lastly, a number
of global conflicts could escalate in the coming
months. Expanding discord in the Middle East
or additional conflict in the Ukraine region will
place more downward pressure on Europe and
the broader global economy.
Foreign central banks easing while the Federal Reserve tightens target interest rates will
exert additional upward pressure on the dollar
and, subsequently, downward pressure on U.S.
exports and economic growth. Given the weak
outlook for growth and slower momentum, a
spike in oil prices could easily push the U.S.
economy into recession. Tightening lending
standards could slow home price appreciation
and contribute to a further slowdown in growth
or push us into an official recession.
While I don't currently believe that a recession
is imminent, the risk of a U.S. recession is decidedly more pronounced now than a few months
ago.

CES on the Hill
April 19
Washington, D.C.
Digital Patriots Dinner
April 20
Washington, D.C.
CES Asia 2016
May 11-13
Shanghai, China
20th CEO Summit
June 21-24
Tel Aviv, Israel
CTA Innovate!
September 20-22
San Jose, CA
CT Hall of Fame Dinner
November 9
New York, NY
CES Unveiled
November 10
New York, NY
CES 2017
January 5-8
Las Vegas, NV
For more information
on CTA events, call 703907-7600 or visit CTA.
tech.
MARCH/APRIL 2016

http://www.CTA.tech/events http://www.CTA.tech/events http://www.CTA.tech/i3

i3 - March/April 2016

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