Investment experts highlight a recession risk could still be in the cards amid an economic slowdown in the US
Several investment experts are pointing to economic data and trends that signal a slowdown for one of the robust economies of the world.
But is this a natural cooling-off period for the US after years of strong growth, or are we inching toward a more serious downturn?
While Michael Greenberg isn’t convinced that a recession is imminent, he does acknowledge the growing uncertainty. He attributes much of this uncertainty to policy decisions, particularly tariffs, which he expects to linger.
“I wouldn’t say we’re of the belief that there's going to be a severe recession because I don't think that's the goal of the administration either,” said Greenberg, SVP and head of Americas Portfolio Management at Franklin Templeton Investment Solutions, adding that corporations and consumers are both in good shape, despite being slightly entrenched.
“We’ve moved from a period that was fairly robust growth... to something more neutral, to potentially something maybe slightly below trend,” he added. “If we are in this uncertain environment for longer, it just continues to weigh on consumer and business sentiment.”
Meanwhile, Russell Investment’s year-ahead recession risk estimates for the US are 30 per cent, explained BeiChen Lin, senior investment strategist and head of Canadian strategy at Russell Investments.
“That means our base case is still for a soft-landing, but recession risks are still above the historical average of around 15 to 20 per cent. Elevated policy uncertainty is one contributing factor for why we are assessing recession risks as above average.”
Additional warning signs from Lin show that consumer confidence has softened, with recent data from the University of Michigan signalling a decline in consumer sentiment expectations.
Lin does underscore trade policy as a key risk factor, noting that if tariffs against steel, aluminium, China, Canada and Mexico are in place for “a protracted time period… we could see a 0.5 per cent to 0.75 per cent dent to US GDP growth.”
While that would slow growth below trend, it wouldn’t necessarily trigger a recession but given that consumer spending drives a significant portion of US GDP, any pullback could have ripple effects across the economy.
“If I'm a business, it's very difficult to have long term planning when there's so much uncertainty. Businesses tend to sit on their hands a little bit, maybe not invest and wait and of course, that has implications as well and we’re seeing that… We probably are going to see economic data continue to slow,” Greenberg said.
For institutional investors, the uncertainty around the US downturn presents a dilemma as the US stock market has enjoyed years of outperformance.
“We have seen really massive outperformance from the US equity market for many years now versus other regions like Europe,” Greenberg noted.
Although macroeconomic uncertainty remains high, the US economy is not entering this period from a position of weakness as Lin pointed to the economic fundamentals that are still relatively strong.
“US companies generated strong earnings growth, with Q4 2024 S&P 500 earnings growing at an exceptional pace of 17 per cent year-over-year,” he said. “US unemployment remains relatively low in the historical context, and initial jobless claims still look well-behaved.”
US slowdown affects Canadian exports
The slowdown in the US will no doubt have implications for Canada. Given the close trade ties between the two economies, any weakness in American demand will impact Canadian exports.
“Some of the pressure on the US market is directly because of the policy that’s directed towards Canada,” said Greenberg.
Lin echoed that concern, noting that Canada is a key trading partner of the US and exports to the US account for around 20 per cent of Canadian GDP. “A slowdown in the US could reduce US exports and weigh on the Canadian economy.”
Greenberg asserted institutional investors need to account for this in their portfolios, ensuring they aren’t overly exposed to any single market or asset class.
Much of the current uncertainty also hinges on the labour market as he added the employment market has slowed, “but by no means is it weak,” he said.
Lin agreed that real inflation-adjusted wage growth is still robust, both for upper-income and lower-income earners, emphasizing that the latter group is particularly important because “lower-income earners tend to have a higher marginal propensity to spend.”
If that spending weakens, it could add to broader economic headwinds. For now, though, Greenberg advised institutional investors to resist the temptation to overreact.
“Many institutional investors, many pension funds, and, in fact, many retail investors, have a fairly long-time horizon. That’s an advantage to be able to ride out volatility,” he added. “We’ve seen recessions before, we’ll see them again.”
Lin also emphasized the importance of measured decision-making, noting that although forward one-year equity market returns can be healthy when markets get oversold like their current state, “elevated macroeconomic uncertainty keeps us cautious,” said Lin.
“The prudent choice for institutional investors might be to still stick close to their strategic asset allocations, rather than making big tactical tilts.”
