Neil Dutta: Don’t Expect Recession in 2017 With the Bulls in Charge

Wed, Dec 14, 2016 - 2:19pm

The following is a summary of our recent podcast interview with Neil Dutta, which can be listened to on our site here or on iTunes here.

Though there’s been some concern of a recession cropping up in 2017 or 2018, the economic reports we’ve seen recently haven’t highlighted any immediate cause for worry.

This time on FS Insider, we spoke with Neil Dutta, head of US economics at Renaissance Macro Research, to get his take on where markets are headed and what economic indicators are telling us.

Recession Calls are Misguided

“Those that were prematurely making these recession predictions, those arguments have lost all credibility over the last 6 to 9 months,” he said.

Recently, we’ve seen the markets being repriced substantially after the election. In terms of economic data, we’ve seen continued job growth. Additionally, manufacturing and service sector PMIs are consistent with about 3 percent real GDP growth, Dutta stated.


Source: Bloomberg

“I think the risks are skewed to the upside,” he said. “We’ve seen a steady drumbeat of positive data surprises.”

Real consumer spending looks solid, and commodity prices have rebounded, he added. Given where final demand is, there’s room for inventories to restock, which may also serve as a tailwind for growth.

“What we’re seeing is a broadening out of the recovery, away from just real consumer spending to more of a contribution from businesses.”

Are the Employment Numbers Rigged?

The official unemployment rate recently came in at a 9-year low at 4.6% but many don't think this is reflecting true economic reality.

“If it were true that there were a vast overstatement (in the employment numbers), why is it that consumer confidence is at a cycle high,” he asked. “It suggests that the drop in the unemployment rate is for real.”


Source: Bloomberg

It’s premature to be talking about recession in the US right now, he stated. The onset of recession is usually preceded by a number of factors we haven’t observed yet.

For instance, there aren’t any obviously stretched sectors in the US economy and inflation is picking up.

“The Fed is still trying to engineer inflation higher, let’s not forget,” Dutta said. “I don’t think 2017 or 2018 will be recession years.”


Source: Bloomberg

There is a risk of a dollar breakout, to an extent, but right now, it looks like emerging markets are coping, Dutta noted.

“The thing that I’m actually looking at is the policy that’s going to be coming out of Washington,” he said. “I think the risk is, the larger the fiscal stimulus, the bigger the risk to the economy. This whole notion that we need a big fiscal stimulus, with the unemployment rate south of 5 percent, I think is a bit off base.”

Listen to this full interview with Neil Dutta by logging in and clicking here or on iTunes here. Become a subscriber and gain full access to our premium podcast interviews with leading guest experts by clicking here.

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