Wall Street Turmoil to Bend, Not Break,

Economic Expansion
Rich Miller RichMiller28
January 28, 2016 2:00 PM EETUpdated on January 28, 2016 4:31 PM EET
The turmoil in financial markets may slow the U.S. economic expansion. But it probably
wont kill it.
While the threat of a downturn has risen, consumers and companies have the wherewithal to
weather the turbulence in stocks and keep the economy afloat, economists say.
"The risk of a recession in 2016 is pretty low, certainly under 25 percent," said David
Hensley, director of global economics for JPMorgan Chase & Co. in New York. "Im more
worried about growth downshifting to 1 to 2 percent than I am about a recession."
Federal Reserve Chair Janet Yellen and her colleagues suggested Wednesday that they
might put off raising interest rates in March in response to the more uncertain economic
outlook. The central bank increased rates in December for the first time in nine years.
Since hitting bottom in June 2009, the economy has withstood a series of shocks -- a near
collapse of the euro zone and a government shutdown in the U.S., to name but two -- on its way
to recording the fourth-longest expansion since the end of World War II. Its also been the
weakest, with gross domestic product climbing at a mere annual pace of 2.2 percent.
Slowdown Projected
Government figures Friday are forecast to show GDP growth decelerated in the final
three months of 2015, to a 0.8 percent annualized rate, from 2 percent in the third quarter,
according to the median projection of economists surveyed by Bloomberg. Behind the predicted
slowdown: a sharp slackening in inventories by manufacturers and other businesses and a larger
trade deficit.
So far this year through Wednesday, U.S. stock prices have fallen about 8 percent,
wiping trillions of dollars off wealth. The steep drop in equities, coupled with a shake-out in the
corporate-bond market, also has raised the cost of capital for companies, making it more
expensive for them to expand.
Businesses are more vulnerable to succumbing to the shock from the markets than
consumers, according to Hensley. Thats because companies also are being squeezed by rising
labor costs and a general lack of pricing power, while households continue to benefit from a
strong job market and falling gasoline prices.
The biggest risk is that a panic in the financial markets so unnerves consumers and
companies that they slash spending, driving the economy into recession, said Joel Prakken, cofounder of St. Louis-based Macroeconomic Advisers LLC.
So far at least, Americans seem to be taking the stock-market rout in stride.
Not Panicking
"This is not the first time that Ive seen a drop, sadly," said Detroit native Lindsay
Madden as she browsed through a Tesla Motors Inc. showroom in Washington. "So I am not in
a panic, not fussing about it."
Americans surveyed by the Conference Board this month seem similarly sanguine, with
34.6 percent expecting equity prices to decline over the coming year. While thats up from 30.5
http://www.bloomberg.com/news/articles/2016-01-28/wall-street-turmoil-to-bendnot-break-u-s-economic-expansion

percent in December, its still below the 38.5 percent recorded in September, when financial
markets were first spooked by developments in China.
Overall consumer confidence climbed in January to a three-month high, according to a
sentiment index compiled by the New York-based private research group.
"The gains weve seen in employment, the declines in gas prices at the pump and
increases in house prices are helping to offset the volatility in the financial markets," said Lynn
Franco, the Conference Boards Director of Economic Indicators.
An extended bout of turbulence though could sour sentiment and cause consumers to become
more cautious in their spending habits. Even before the recent fallout in financial markets,
households were electing to take advantage of falling gasoline prices to boost savings.
Jobs Supreme
Franco though said that, in the end, the most important determinant of consumer
confidence is the job market.
And on that score, the news is first rate. Payrolls expanded by more than 280,000 per month on
average in the last quarter of 2015, the strongest three-month showing of the year.
Some economists though worry that the good times for workers wont last if businesses
decide to respond to the tumult in the stock and corporate-bond markets by retrenching.
Mixed Data
News on the economy was mixed today. On the plus side, the Labor Department
reported that applications for unemployment benefits declined last week from a six-month high,
indicating that firings remain low in spite of the financial volatility.
A separate report from the Commerce Department was more downbeat. Orders for
business equipment fell in December by the most in 10 months, a sign companies were slashing
capital investment even before the turmoil in global financial markets
Companies are under pressure to cut back because sales have been stagnant while their
wage bill has been rising, said John Lonski, chief economist of Moodys Capital Market
Research Group in New York. Expenses per worker adjusted for productivity-- so-called unit
labor costs -- increased 3 percent in the third quarter of 2015 from the same time a year earlier,
the most since the first three months of 2014.
While economist Allen Sinai is also troubled by the lagging corporate earnings, he said
that companies are "in super shape financially."
Corporations had more than $1.9 trillion in cash and other liquid assets on their balance sheets
as of Sept. 30, 2015, according to figures from the Federal Reserve.
Sinai, the chief executive officer of Decision Economics Inc. in New York, said the odds of
what he called a "growth disappointment" had risen with the turmoil in the markets. But a
recession still seems a remote possibility.
"Can the American consumer carry the day for the U.S. economy and rest of the world?" Sinai
asked. "I say yes, it can. But I do worry about risks to some of the fundamentals that drive
consumer spending."

http://www.bloomberg.com/news/articles/2016-01-28/wall-street-turmoil-to-bendnot-break-u-s-economic-expansion