Is the U.S. headed back towards recession?

By: Dr. Lynn Reaser

Mixed economic news and tre-mendous market volatility have raised new questions about the economy.  Are we headed towards a “double-dip” or retreat back into recession?

At this point, the answer appears to be “no”.  July’s job report was an important and positive sign.  Although not robust, the creation of 154,000 private sector jobs indicates that businesses still had enough confidence to hire despite tremendous uncertainty swirling around the U.S. debt situation.  We may not escape the “soft patch” in the economy quickly, but a fall back to recession appears unlikely.  July’s employment growth and increased wages should combine with lower oil prices and an ending of major supply chain disruptions to give the economy some lift in this year’s second half.  The primary risk facing stocks involves the ability of governments in Europe and the U.S. to get their financial houses in order.

The stock market’s primary worry surrounds the financial health of governments as fears persist that Spain and Italy could follow the paths traveled by Greece, Portugal, and Ireland.  These fears spread to the U.S. last Friday as S&P downgraded its rating on U.S. debt.  The U.S. Federal Reserve’s action on Tuesday, indicating that policymakers will hold interest rates close to zero for at least two years, provided some solace.

On balance, investors should not make major changes in their long-term investment plans at this point.  Markets are too volatile.  Corporate balance sheets are strong.  The public sector just needs to get its financial house in order.


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