Talks of U.S. recession bit overdone; fundamentals do not indicate a recession, says Wells Fargo

Talk of an imminent U.S. recession is a bit overdone as underlying fundamentals of the U.S. economy do not indicate that recession is right around the corner, despite the yield curve inverted a bit recently, concluded Wells Fargo in its recent report.

The U.S. yield curve has inverted raising fears of a recession. Although its track record as a predictor is good, a number of other indicators suggest that there is still life left in this cycle. In recent times. 10-year yields have fallen sharply, resulting in the 10-year–3- month yield curve inverting. This indicator is said to be the bellwether for predicting recessions.

“Household balance sheets are generally solid. Leverage in the NFC sector has risen in recent years, but it probably is not so high now to cause a recession in the near term. Growth in many foreign economies has slowed, but it would take significant downturns in the rest of the world to bring the U.S. economy to its knees,” Wells Fargo noted.

The world's fourth-largest bank by market capitalization said that “what is the most realistic way that the U.S. economy slips into recession in coming months? In the absence of some shock that is unforeseen at this time, the most realistic way for a recession to happen in the foreseeable future is that we simply “talk” ourselves into one. Consumers could hear about prognostications of recession and could stop spending. Businesses could curtail investment and hiring decisions if they surmise that recession is on the way. The stock market would likely weaken, leading to a negative feedback loop.”

The Fed Funds futures market is now fully pricing in a possible rate cut by year-end, and we expect that the 10-year U.S. Treasury yield will make a run for the 2.3 percent handle amid month/quarter-end re-positioning flows.

“With real GDP growth having slowed already, it may not take much of a risk shock to tip over the economy at this time. In short, expectations of economic weakness could become self-fulfilling. Fortunately, we have never “talked” our way into recession, at least not in living memory. In the immortal words of Franklin Delano Roosevelt, “the only thing we have to fear is fear itself,” the third largest bank in the U.S. by total assets added.