As we usher in the New Year, the financial landscape has taken a tumultuous turn. Just one week into January, it seems we are in for a rollercoaster ride full of surprises and challenges.
For instance, on Monday, a frenzy among Chinese investors sent the Shanghai Stock Exchange into chaos. A simultaneous wave of sell orders nearly overwhelmed the market’s circuit breakers. By early afternoon, these breakers had to be activated to prevent a complete market collapse. According to Bloomberg, here are the details:
“The worst-ever start to a year for Chinese shares prompted a trading halt across more than $7 trillion worth of equities, futures, and options, putting the nation’s new market circuit breakers to the test right on their inaugural day.
“Trading was suspended at approximately 1:34 p.m. local time on Monday after the CSI 300 Index plummeted by 7 percent. An earlier 15-minute suspension at the 5 percent threshold failed to stem the decline, as stocks resumed their downward trend immediately after the market reopened.”
The market turmoil was largely attributed to data revealing that Chinese manufacturing had contracted for the fifth consecutive month. As if that weren’t enough, on Thursday, traders tinkered with the system again, triggering circuit breakers for a second time that week, leading to another day of halted trading.
Reality vs. The Fed’s Narrative
In the United States, stock market fluctuations mirrored those in China. From the market’s open on Monday to Thursday’s close, the DOW plunged 891 points—a drop of over 5 percent. Similar to China, U.S. manufacturing data released on Monday might have played a role in this decline.
“The U.S. manufacturing sector further contracted in December, as revealed by an industry report released Monday,” reported CNBC. “The Institute for Supply Management (ISM) reported that its index of national factory activity slid to 48.2 from the previous reading of 48.6.” A reading below 50 indicates a contraction.
It wasn’t just manufacturing that started 2016 on a negative note. The Department of Commerce reported a 0.4 percent drop in construction spending in November 2015, marking the largest decline since June 2014.
On Wednesday, the Commerce Department added to the woes, reporting declines in both U.S. imports and exports. Exports fell by 0.9 percent, while imports declined by 1.7 percent. What does this signify?
The prevailing narrative from the Federal Reserve is that economic activity is on the rise, and the economy is stable. San Francisco Fed President John Williams asserts that the economy has solid fundamentals and is on a strong upward trajectory. He predicted three to five interest rate hikes for the year, along with a forecast of 2.25 percent growth.
His colleague, Cleveland Fed President Loretta Mester, anticipates U.S. economic growth of 2.5 to 2.75 percent. She remains confident that the economy is in “very good shape,” due to “very aggressive monetary policy actions” taken previously.
The Muted Delight of an Impending Recession
Perhaps the lackluster manufacturing, construction, and trade data are mere anomalies. It’s possible the Federal Reserve can see a clearer picture beyond the current fog. However, skepticism arises—are they losing their grip on reality? Their outlook starkly contrasts with that of everyday workers and even economists at Deutsche Bank.
“On Tuesday, Deutsche Bank economists revised their U.S. economic growth forecasts for the fourth quarter of 2015 and the first quarter of 2016 downward, following recent disappointing reports on trade, construction spending, and manufacturing activity.
“In a research note, they lowered their domestic gross product outlook for the last three months of the previous year by 1 percentage point to 0.5 percent, suggesting it ‘might still be too high in light of potentially larger inventory liquidation than previously assumed.’”
Clearly, if GDP approaches levels significantly below 0.5 percent, it teeters on the edge of negative territory, suggesting the U.S. economy may be close to, or already in, a recession.
However, confirming this will only be possible in hindsight. By definition, a recession requires two consecutive quarters of negative economic growth, meaning the economy might have to be in recession for at least six months before it’s officially recognized.
Among the many spectacles in life is watching a public figure step up with bold confidence, only to stumble dramatically. In this context, we might be seeing a significant misstep from Fed Chair Janet Yellen, who may be raising interest rates just as the economy heads into recession.
Regrettably, this situation diminishes the thrill of witnessing such a moment, overshadowed by the potential hardship facing the general populace.
Sincerely,
MN Gordon
for Economic Prism
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