By Josh Zumbrun
A growing number of corporate leaders and economists see
mounting risk of the U.S. tipping into a recession, a nod to
headwinds posed by the global growth slowdown and early-year
convulsions in financial markets.
The odds of recession in the next 12 months have climbed to 21%,
double the level of a year ago and the highest since 2012,
according to the average estimate in The Wall Street Journal's
monthly survey of economists. Economists at Bank of America Merrill
Lynch peg the chance of recession in the next 12 months at 25%.
The darkening sentiment--coming despite positive readings in
many U.S. economic indicators--reflects worries that the world's
top economy won't be able to stay healthy when so many foreign
economies are sagging.
"The toxicity of the global economic environment continues to be
a threat," said Sean Snaith, director of the University of Central
Florida's Institute for Economic Competitiveness.
Against this backdrop, Fed Chairwoman Janet Yellen said Thursday
in testimony before the Senate Banking Committee that she sees
several risks to the U.S. economy and that the central bank is
carefully monitoring global financial markets and economic
developments that could affect growth.
But she reiterated her view that a contraction isn't imminent.
"There is always some chance of a recession in any year, but the
evidence suggests expansions don't die of old age," Ms. Yellen
said. "It is not what I think is the most likely scenario."
She also emphasized that the Fed is staying flexible on the
outlook for rates, noting several times that interest rates aren't
on a "preset course." Yet she added that it's premature to say
whether recent developments have shifted the balance of risks to
the downside.
The broad slump in financial markets, however, is feeding into
downside concerns from business leaders and private economists.
Take the situation at PepsiCo Inc., where quarterly profit
surged but Chief Executive Indra Nooyi cautioned of a "delicate"
recovery. Ms. Nooyi said the U.S. economy could be dragged down by
weaker economies and political upheaval in places like Brazil, the
Middle East and China that have sent foreign currencies sharply
lower.
"Over my several decades in business I have never seen this
combination of sustained headwinds across most economies, combined
with high volatility across global financial markets," she
said.
At networking-equipment giant Cisco Systems Inc., which reported
a 31% jump in quarterly net profit on Wednesday, there were signs
that weakening economic conditions have taken a toll on corporate
customers.
Chuck Robbins, Cisco's chief executive, said the company began
hearing signs of caution among some customers in January, toward
the end of the quarter. In response to developments such as
declining stock prices, he said, companies began holding up orders
on nonessential purchases such as some types of the switching
systems used on corporate campuses.
Market and corporate sentiment has taken a negative turn, but
only some economic indicators have followed suit. Industrial
production has declined, primarily due to drops in oil drilling and
output from utilities. Employment in the oil sector has fallen
sharply.
The decline in energy production, as well as a strong U.S.
dollar, has put pressure on manufacturers. U.S. factory activity
contracted in January for the fourth month in a row, according to
the Institute for Supply Management.
Still, other domestically oriented sectors are performing
solidly. Household spending has continue to rise--up 3.2%. Although
incomes have been growing slowly, the plunge in gas prices means
that incomes have outpaced inflation. Various labor-market
barometers have been giving healthy readings, including the 4.9%
unemployment rate, down from 5.7% a year ago and a broader
underemployment rate that's fallen to 9.9% from 11.3%.
Initial jobless claims, a weekly measure of layoffs, fell to the
lowest level since December, according to a Labor Department report
Thursday. Initial claims--usually one of the first indicators of
trouble in the economy--remain near the lowest level of the past 40
years.
"Economic activity remains on track despite financial market
turbulence, " said Ram Bhagavatula, an economist at hedge fund
Combinatorics Capital LLC.
This disparity between sentiment and indicators underscores the
conundrum the central bank faces: The Fed is projecting continued
modest U.S. economic growth and gradual increases in inflation and
interest rates in the months ahead.
However, the Fed leader acknowledged risks to the outlook that
could alter the central bank's path. "A lot has happened since" the
Fed's December meeting, when officials said it likely would be
appropriate to continue gradually raising interest rates, she
said.
"Foreign economic developments, in particular, pose risks to
U.S. economic growth," she said. Pointing to the slowdown in
China's economy, she said "this uncertainty led to increased
volatility in global financial markets and, against the background
of persistent weakness abroad, exacerbated concerns about the
outlook for global growth."
She said the central bank will have more to say about the growth
outlook following its next policy meeting March 15-16, when Fed
officials will deliver a new summary of economic projections.
"We're in the process of evaluating...our assessment of the balance
of risks."
Of particular concern to many economists is the long slide in
oil prices. While Ms. Yellen points to the consumer benefits of
paying less on gasoline, the boom in U.S. oil production over the
past decade now means that a substantial U.S. industry is directly
harmed when prices drop so steeply.
"Falling oil prices are bad news for 2016 growth," said Thomas
Costerg, senior economist at Standard Chartered PLC, who showed the
greatest alarm of participants in the Journal's economists survey.
He put the odds of recession in the next year at 50%.
While the current economic expansion has been underwhelming, it
has lasted a long time by historical standards. The average
economic expansion since World War II has lasted for slightly less
than six years. The current expansion, which began in June 2009,
has lasted for more than 6 1/2 .
"We are in the bottom of the seventh on this cycle," said Kevin
Swift, chief economist of the American Chemistry Council.
Mike Esterl and Don Clark contributed to this article.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
(END) Dow Jones Newswires
February 11, 2016 19:58 ET (00:58 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.