We have moved our probability for a US recession within the next 12 months up to about 25%; that is up from a 10-15% chance in December last year. But of course this still leaves us with a 75% chance that a recession can be avoided. Manufacturing has been hurt by the fall in crude, down 72% since June 2014, but has also been struggling with the strong dollar, up 22% according to the Bloomberg dollar spot index, since mid-2014.
Four states that are very oil dependent with concentrations of energy companies: Alaska, North Dakota, West Virginia and Wyoming are in a recession according to Moody’s Analytics; three others: Louisiana, New Mexico and Oklahoma are all at a high risk of recession according to their report. In fact according to the US Labor Department the US economy added 2.7 million workers in 2015, while 18,800 jobs were lost in North Dakota, 11,800 in West Virginia and 6,400 in Wyoming.
Somewhat surprisingly Texas added 166,900 jobs over 2015 (behind only California and Florida). Although growth in the state had slowed, jobs were added in the diversified areas of technology centred in Austin and development in Dallas. In addition, US producers that compete globally were affected especially by the dollar’s strength. According to an economist at the Philadelphia Fed, this has caused an economic downturn in Illinois, Wisconsin and Mississippi over the last few months.
Of course, that leaves 40 other states in better shape; this somewhat patchy economy was touched on by Fed Chair Yellen when she spoke with congress earlier this month stating that falling energy prices “have caused companies to slash jobs and sharply cut capital outlays” but she didn’t expect a nationwide recession. However she added, “There would seem to be increased fears of recession risk” reflected in tightening financial conditions. A recent Bloomberg survey of economists found that the chances of a recession within twelve months jumped to 20% the highest since February 2013.
An indicator we watch closely is the ISM data, both the Manufacturing PMI and the Non-Manufacturing Index (NMI). The manufacturing PMI index hit a recent peak in August 2014 at 58.1, a high since April 2011, and has fallen to a low of 48 at December’s month end, with a small bounce in January to 48.2, a 17% fall. Probably not surprising given the oil and strong dollar impact. However, the NMI peaked as recently as July last year at 59.6 a high since 2005, but January’s recent release came in at 53.5 a steady decline over the short period of over 10% this is a concern for the broader economy and a situation we continue to monitor closely.