It has been a horrible start to the year – a sharp escalation of geopolitical tensions between Iran and Saudi Arabia have sent shock waves through the global stock markets today. In China trading was suspended as stocks fell 7% and we have also seen sharp sell-offs in the European stock markets today.
To makes things worse the latest news for the US economy is far from uplifting. Hence, ISM for December fell to 48.2 from 48.6 in November indicating a contraction in the US manufactoring sector.
My good friend Michael Darda – Chief Economist at MKM Partners – makes this interesting observation:
The ISM Manufacturing Index came in at 48.2 in December, the second consecutive month of contraction. The ISM New Orders Index also came in below 50 for the second consecutive month, suggesting ongoing weakness in S&P earnings growth and capital spending trends. Although it is not unusual for the ISM Index to fall below the 50 threshold during an economic expansion, it is unusual for the Fed to hike rates/tighten monetary policy with the ISM Index below 50. Going back to 1948, we count only six instances when the Fed hiked rates with the ISM Index below 50: five of those episodes were associated with a recession occurring between one and six months later.
So is the US facing a recession? I don’t know, but if the Federal Reserve insists on continuing to hike interest rates through 2016 and if we on top of that get a negative supply shock in the form of rising oil prices on the back rising geopolitical tensions in the Middle East then I certainly would think that we could move close to a US recession in 2016.
But that need not to happen if the Federal Reserve acknowledges that US monetary conditions are already tight rather than easy and hopefully cooler heads will also prevail in the Middle East.