6 Reasons We Won't Get a Recession

Job and income growth are still providing a strong foundation despite the weakness in housing.


After perusing the blizzard of U.S. economic data that we've gotten this week, you could easily—and quite plausibly—draw this megaconclusion: The Federal Reserve will cut interest rates again, inflation is under control, and while the economy is weakening, it won't slip into recession. Here is the evidence:

1) Yes, the housing market is still dreadful. New-home sales in August hit their lowest point in seven years and are down 21 percent from a year ago. But don't forget that housing is less than 5 percent of the total economy. It's not the whole ballgame.

2) Employment remains amazingly resilient. Initial jobless claims fell 15,000 to 298,000 in the week ending September 22, the lowest since the week of May 12. The four-week average now stands at a low 312,000. "Initial claims continue to send an upbeat message on labor markets," concludes economist Haseeb Ahmed of JPMorgan. He thinks the economy probably added 100,000 new jobs in September.

3) As long as people have jobs, it looks as if they will continue to spend. Real consumer spending rose 0.6 percent in August, putting the quarter on track for a 3.4 percent gain even if they shut their wallets and purses in September. Consumer income was up 4.5 percent on an annual basis, not counting inflation, so in real terms it rose some 2.5 percent. "No evidence of economic weakness here," says economist Robert Brusca.

4) Inflation remains subdued. The core personal consumption expenditure price index out today rose only 0.1 percent (0.09 percent if you take it out another decimal place) in August. That puts the 12-month rate at just 1.8 percent (1.76 percent, actually), below the Fed's presumed 2 percent maximum target rate. If the Fed wants to cut interest rates some more, it certainly has the cover to do so.

5) Corporate profits are strong, increasing at a 26.8 percent annual rate in the second quarter, the fastest since early 2006. Nearly 30 percent of earnings came from overseas sales. Economies typically don't start shrinking when corporate profits are strong, and the global economic boom is helping a lot. Certainly with the stock market moving back toward record territory, investors aren't looking for the Big "R."

6) I will give my guy Ed Yardeni of Oak Associates the last word: "An economywide recession? We lowered the probability from 30 percent back to 15 percent on September 19, following aggressive easing moves by the Fed on August 17 and again on September 18. We expect real [gross domestic product] will grow about 2 percent during [the second half of this year], as the housing recession remains a major drag on growth. Next year, GDP growth should improve to 3 percent, led by productivity. We continue to forecast core inflation around 2 percent for both this year and next, with the bond yield trading around the funds rate. Our big bet remains that productivity is alive and well, which should keep inflation in check, boost profits and real incomes."