The President gave his second State of the Union Address this week; happily, it was a little more upbeat than the dystopic view he presented during his inaugural address. Certainly, the recent employment reports have been encouraging, as has been the recent ISM manufacturing data, which is proving to be a little more resilient than anticipated in the face of the heightened uncertainty around slower global growth, the shutdown, and the ongoing trade disputes. Meanwhile, the consumer is in relatively good shape, the participation rate continues to surprise to the upside, and wages are starting to push upward, yet prices are quiescent—which is an encouraging sign that underlying productivity growth is potentially improving and also gives the Fed some extra room for manoeuvrability. In our view, the cycle is also very long in the tooth, and as such, the risks around its sustainability are necessarily increasing. While we do not believe the U.S. will dip into recession this year (as is happening across Europe), one within the next two to three years seems quite probable. We continue to see five key major risk factors around this recovery, which we are monitoring closely. In the last few weeks, a number of these risks have diminished in their intensity—but have definitely not disappeared. In this week's Economics Weekly, we discuss these five risks.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.