While fears of a coming recession always seem to resurface every two to three months or so, especially since the U.S. hasn’t seen a major downturn in over ten years, anxiety in the markets has reached a new high.
With the return of the much-dreaded inverted yield curves, declining global economic figures, and the ongoing U.S.-China trade tensions coming together to create the perfect conditions for a potential recession, it’s now the bulls who are the contrarians.
One such optimist happens to be the head of one of Wall Street’s biggest investment bank. Brian Moynihan, CEO of Bank of America, said that he doesn’t see a recession coming mainly due to the fact that consumer demand remains healthy.
“The underlying consumer is doing well and making more money. More importantly, they’re spending more money. The U.S. consumer continues to spend and that will keep the U.S. economy in good shape…“and most people believe that the China situation, which is very difficult, is going to take a long time to resolve fully,” said Moynihan to CNBC’s Becky Quick on Wednesday. Moynihan added that the bank’s consumer base has spent over $2 trillion this year, a 5.9% increase from the same time last year. In response to the yield curve, he ended up dismissing it as a bit of an overrated indicator and that there are complicated factors at play. “Look, when the yield curve moved around the pundit-ocracy got going, saying, ‘Here, this means a recessions coming. But if you actually think about it, there could be two reasons that the yield curve is moving around and you’re seeing that debate take hold.
The Wall Street banker argues that recession fears have been driven more due to political reasons, such as the ongoing U.S.-China trade war while other factors such as tensions in the Strait of Hormuz have been spurring worries on, whereas the economy itself has remained far more stable then most investors would give it credit.
Moynihan says that the world will need to get used to the ongoing trade conflict and will reach a point where the market won’t be as volatile in response to these developments.
The trade war, coupled with a slowdown in economic activity, was one of the reasons why the Federal Reserve cut rates by 25 basis points last month. Traders also are betting that the central bank will again cut rates in September with President Trump ramping up pressure on the Fed recently by comparing chairman Jerome Powell to “a golfer who can’t putt.”
According to data released by the Bureau of Economic Analysis, consumer spending makes up just over two-third – 68 percent – of America’s economic activity, so as long as consumer spending remains strong, the economy will still remain afloat.
While it’s not certain whether this argument is justified entirely, especially as consumer debt remains high, what this does suggest is that even if a downturn is inevitably on the horizon, it likely will remain a soft recession rather then a dramatic one as seen back in 2008.
