Will the US see a double-dip recession?

The fact that the US recovery needs an elaborate defence suggests that things are far from certain. US consumers need to loosen their purse strings a bit more for demand to drive growth, point out Abheek Barua & Bidisha Ganguly.

If the panic attack over China's deteriorating fortunes weren't enough, there are some analysts fretting over whether the US will start slowing down again and in the extreme case slip into a double dip recession.

There are clearly some ominous portends. Recent data suggests that gross domestic product (GDP) growth is likely to have decelerated to between one per cent and 1.5 per cent (on an annualised basis).

Corporate credit spreads, the difference between corporate borrowing rates and risk-free government bond rates have widened signaling perceptions of increasing risk of default (associated with a downturn in the economy).

The stock-market has plummeted again and to top it all, the closely watched purchase manager's index (PMI) showed that the manufacturing sector has contracted in December. 

It might not be prudent in these uncertain times to dismiss this altogether. There are many questions about the sustainability of the US recovery that remain unanswered.

However, influential think-tanks like Capital Economics (Is the US Economy Heading For A Recession, Paul Ashworth, January 11, 2016) caution against fretting too much over these dismal data points.

Some of the arguments draw on statistics and the robustness of certain indicators as leading indicators of recovery.

Ashworth argues that while rising credit spreads have been associated with recessions, they fare rather badly as a forward guidance.

Instead, the thing to watch out for is the difference between the 10-year and two-year government bond yields that appear to pick up turns in the economy.

An inversion in the yield curve, or simply if the 10-year yield falls below the two-year yield, is a sure sign that a recession is around the corner.

That, mercifully, is not the case now and the difference between the two (the 10-year is much higher than the two-year bond yield) and is actually well above the long-term average. 

What about the contraction in the manufacturing sector?

For one thing, it's important to bear in mind the fact that manufacturing is a relatively small percentage (12 per cent) of US GDP and small dips might not turn the needle as far as aggregate GDP is concerned.

One of the reasons that manufacturing is hurting is because it is heavily export-oriented and the dollar is strong.

Ashworth points to a number of instances in the past where the dollar was overvalued, manufacturing contracted and yet there was no impact on aggregate GDP.

All said, the fact that US recovery needs an elaborate defence suggests that things are far from certain.

US consumers need to loosen their purse strings quite a bit more for consumer demand to drive growth decisively and business investments need to pick up.

Consumer spending will get a leg up only if wages move up substantially, but that has not happened yet despite the drop in the unemployment rate.

The fact that the oil and gas block is bleeding from low oil prices means that potential support from this highly capital intensive sector is unlikely to materialise.

The US Federal Reserve might not be able to push through more than just a couple rate hikes this year at best if things continue this way. 

Tailpiece: China desperately needs an image makeover. Its mercantilist policy of keeping its exchange rate undervalued or being a "currency manipulator" as American politicians like to put it, a thing of the ancient past, continues do dog it.

Depreciation in the Yuan is always tagged as "major devaluation", despite the fact that it is all market driven.

Real Effective Exchange Rates calculated by the Bank of International Settlements shows that the Yuan was overvalued by over 30 per cent in November.

Thus, it has a long way to depreciate before it reaches any semblance of a fair value.

Unfortunately, this might drag other emerging market currencies down with it.

Or will other currencies decouple from the beleaguered Yuan? That's an issue we need to grapple with in 2016.

Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is principal economist, CII.