The U.S. economy is unlikely to enter into a recession during the next two years, barring a major asset price correction
Assets are likely overvalued but the effect of a negative correction on the economy should be limited, due to lower levels of private debt and greater financial oversight
The biggest proximate threat to the economy is the U.S.-China trade dispute
MANAMA, Bahrain, June 30, 2019 – Arcapita, a global leader in Shar’iah compliant alternative investments, today published a report evaluating the indicators that predict the likelihood of the U.S. economy entering a recession. According to the report, the economy is performing well, making a recession unlikely until 2020, barring a major asset price correction.
The report suggests that the first class of indicators – those that measure the volume of economic activity, such as GDP, corporate profits and employment, paint a positive picture of the U.S. economy. The first quarter of 2019 saw a growth of 3.2% in the economy, while productivity growth during 2018 was 2.4% – the highest level since 2010.
According to findings, unemployment rates have been falling robustly, from 10% in October 2009 to 3.6% in April 2019. Furthermore, corporate earnings grew at a high rate of 7.8% during 2018, boosted by the Republican tax cut, while asset prices continue to perform favourably. Housing prices have witnessed a strong growth since 2012. While stocks are overvalued and due for a negative correction – according to Shiller PE ratios – the financial regulations enacted following the crisis of 2008 are likely to slower growth rather than an actual recession.
The report further explores political factors that will affect the U.S. economy. The upcoming presidential race in 2020 provides the impetus for President Trump to stimulate the economy in the run-up to the elections, a significant factor that lowers the likelihood of a recession. This could include a tax cut by executive order targeting middle class, an infrastructure spending bill and increased efforts to resolve the trade dispute with China, which is the most proximate threat to the economy at present.
While economic and political factors suggest a recession is highly unlikely, the report also highlights social issues such as gaps in the pension system which are likely to cause social and economic tensions in the long run. Despite these challenges, the U.S. is well-positioned to remain a top investment destination given that it is the most important source of technological progress in the world.