Global Sector Views: Is the U.S. Headed for Recession?

While many signals indicate that the U.S. economy is heading for recession, we believe trade tensions could be distorting the outlook. Director of Research Carmel Wellso argues that investors should prepare for more market volatility and focus on companies that are less dependent on economic expansion for growth.

Key Takeaways

  • Several leading economic indicators suggest the U.S. economy, now more than 10 years into its expansion, could be nearing a recession.
  • While growth appears to be slowing, we believe the U.S.-China trade war has amplified worries over the economic outlook and could be distorting some indicators.
  • As such, we think investors should be prepared for heightened market volatility and focused on so-called defensive growth companies: firms with secular growth drivers, strong balance sheets and competitive advantages.

More than 10 years since the Global Financial Crisis, the U.S. economic expansion is now the longest on record – leading many investors to wonder whether a recession is just around the corner.

Plenty of signals suggest a contraction could be nearing. In August, the yield on the 10-year U.S. Treasury temporarily fell below that of the two-year note, creating a so-called inverted yield curve – a phenomenon that has occurred before every U.S. recession since 1955. During the same month, economic activity in the U.S. manufacturing sector contracted for the first time in nearly three years as measured by the Institute for Supply Management’s Purchasing Managers’ Index (PMI).

We track these signals closely but also believe trade tensions could be distorting the outlook. As illustrated in the charts below, capital expenditures (capex) among large manufacturers have plummeted due to uncertainty about supply chains and waning overseas demand. However, capex plans by small-cap manufacturers, which tend to be domestically oriented, have stayed relatively consistent. Meanwhile, although consumer confidence in the U.S. has wavered recently, sentiment remains elevated as rising wages, low unemployment and declining interest rates create a favorable backdrop for households.

In short, most signals suggest the U.S. economy is slowing but is not at the point of jumping headfirst into a recession. We do not see significant financial or structural risks, such as excessive household or bank debt, but we have had to absorb geopolitical shocks that could proliferate as other events, such as the 2020 U.S. presidential election, unfold.

Against a backdrop of slowing growth, these external shocks can deliver outsized blows to sentiment and ratchet up market volatility. Consequently, we think investors should brace themselves for more turbulence and focus on so-called defensive growth companies: firms with secular growth drivers, strong balance sheets and competitive advantages.

Our 3Q Global Sector Views report expands on this view at the sector level, with detailed commentary on our equity analysts’ outlooks for the Consumer, Energy & Utilities, Financials, Health Care, Industrials & Materials, and Technology sectors, including potential implications for investors.