US and global economy in late business cycle but no recession for next six months

US and global economy in late business cycle but no recession for next six months

By: 
Benjamin Cher
06/10/16, 03:54 pm

SINGAPORE (Oct 6): The US or global economy appears unlikely to be heading to a recession, despite indicators pointing to a late phase in the business cycle and with the threat of monetary policy tightening looming in the horizon.

This is what David Lafferty, chief market strategist, Natixis Global Asset Management, expects because he says the traditional business cycle framework may no longer be the best way to analyse trends for signs of recession.

“It is often pointed out that the post-GFC recovery has been the most anaemic in history, averaging just 2.1% annually since Q3 of 2009, while typical US recovery/expansions average 3%–5%,” says Lafferty.

This means normal business cycles may not play out prominently with recovery and expansion phases lasting longer as fewer excesses have been built up in the system, Lafferty notes.

In summary, Lafferty says the business cycle is now “less useful than before".

Still, he insists the US economy is showing three signs of being in the “late cycle”.

The first being the flattening of the yield curve that started from late 2013.

While the yield curve has predicted nine of the last five recessions, Lafferty questions whether the yield curve reflects equilibrium market rates.

“With the Fed and other central banks holding rates down artificially, we believe this indicator may be even less accurate today,” he adds, “In spite of these caveats, the flattening yield curve is still a late-cycle behaviour.”

The second sign is the high level of credit creation. During expansion, use of debt grows as an increasingly positive outlook justifies higher debt levels. This is where the economy is at today, notes Lafferty.

“While historically low rates are likely driving bond issuance in general, the explosion of corporate issuance globally is certainly indicative of late-cycle behaviour,” says Lafferty.

The third sign is the stretching of asset valuations as investors utilise the economic outlook to justify higher prices.

“With traditional equity and corporate credit valuations moderately above their long-term averages, we see still another hallmark of late-cycle behaviour,” says Lafferty.

So when does this “late cycle” turn into a recession? Lafferty points towards looking at the composite measure of US Leading Economic Indicators (LEI) and the jobs market. The month-on-month change has dropped into the negative twice this year, but still remains above 0.0% on a year-on-year basis.

“Since 1960, there has been only one instance when the y-o-y LEI has fallen below zero without the US immediately entering recession 1967,” says Lafferty.

“There have, however, been several near misses, where the LEI plunged but didn’t go negative, and no recession materialised (1996, 1999, 2003, 2013),” he adds, stating this is analogous to where we are today.

The US jobs market is also an indicator, as US Labor Force Participation has rebounded since bottoming out in Sept 2015.

“As a result, unemployment has stabilised but this understates the strength in the labour market as now more people are working or looking for work,” says Lafferty.

“So the US labour market still appears to have some upside left, which should bolster overall aggregate income and spending,” he adds.

Two major sectors of home construction and auto manufacturing too have room to grow according to Lafferty, having no oversupply.

While monetary policy appears to trigger recessions, Lafferty says it is "over-restrictive" monetary policy that causes the economy to roll over.

“Even though we expect the Fed will raise rates again in December by 0.25%, we believe this is properly categorised as “less accommodative”, and hardly restrictive,” says Lafferty.

Finally, with global recovery and expansion being asynchronous and the US and other economies being at different points of the business cycle, this may help stave off a recession.

“This “diversification” across the cycle has resulted in a weaker expansion overall, but it may also prolong the growth phase,” says Lafferty.

Nevertheless, Lafferty cautions investors to look out for the following signs as a prelude to a recession. These are sustained increase in initial jobless claims or other components in the LEI, material signs of inflation that leads to a more aggressive Fed, and a risk-off shock from an unexpected US election outcome.

Hyflux gets non-binding letter of intent from China suitor

SINGAPORE (June 15): Hyflux has received another non-binding letter of intent (LOI) for a potential investment in the group by an investor based in China. In a Friday night filing, Hyflux says the investor is a subsidiary of a state-owned enterprise in the industrial field which works on a global scale to provide comprehensive power services. “Other fields of expertise of the investor’s holding company include wind and solar energy solutions, nuclear industry, medical technology and agriculture,” says Hyflux. See: Rags-to-riches tale goes sour for Hyflux founder Olivia Lum Se....
Read More >>

Hong Kong suspends China extradition bill

(June 15): Hong Kong’s leader suspended efforts to pass a bill allowing extraditions to China, in a dramatic reversal that she said was necessary to restore order in the Asian financial hub and avoid further violence and mass protests. Carrie Lam, Hong Kong’s chief executive, announced the legislative “pause” at a news conference Saturday, even as activists asked hundreds of thousands of residents who marched in protest last weekend to return to the streets and demand her resignation. Lam acknowledged that debate had shattered a period of relative calm in the former British colony, ....
Read More >>

Chip Eng Seng in joint $47.5 mil investment of China distressed property company

SINGAPORE (June 15): Chip Eng Seng and controlling shareholder Haiyi Investment are jointly investing RMB240 million ($47.5 million) in a distressed property company based in Taicang city in Jiangsu province, China. Chip Eng Seng says the investment will enable the project company to discharge its outstanding liabilities such that its assets will be unsealed and restart a project involving the development and construction of a residential development on a land area of 38,000 sqm, with a gross floor area of 111,111 sqm. The project company, effective controlled by local shareholder Ren We....
Read More >>