Home > Library > Stable Times > Volume 10, Issue 2  

JPMorgan Economist Anthony Chan Sees Little Chance of Recession

The Federal Reserve is raising short-term interest rates. The once white-hot housing market is cooling. Economic growth is slowing, and the stock market may have already notched all the gains it's going to register this year. Economist Anthony Chan's assessment of the U.S. economy may sound gloomy, but in an April 3 address to the Stable Value Investment Association's 2006 Spring Seminar, Chan assured industry executives that his outlook for the economy is actually quite benign.

Chan, Managing Director and Chief Economist for JPMorgan Private Client Services, doesn't discount the impact of the Fed's rate-tightening agenda or the slowing of the housing market on the U.S. economy. He told his audience there are several reasons why neither should trigger a recession. First, he said, the Fed is near the end of its rate-tightening cycle. Following 15 quarter-point hikes that put the federal funds target rate at 4.75 percent in March, Chan said, the Fed is likely to halt its campaign after one or two more increases that would leave the target at most at 5.25 percent. Sometime in 2007, he predicted, the Fed will actually start to lower short-term rates, something it has historically done, on average, just 4.75 months after it stops raising rates.

Chan said the Fed should be able to stop raising interest rates soon, even though the economy isn't sliding into a recession. In part, Chan explained, this is because the Fed began raising rates early in the economic cycle, to head off even a whiff of inflation. And it has worked, he said. Despite soaring energy prices, most companies have virtually no pricing power and "the economy has become more inflation resistant."

To be sure, that might be a tough sell to anyone who fills up an SUV each week or has tried to buy a house in the past couple of years. Gasoline prices are at or near record highs, and so are housing prices in much of the country. Recently, though, the housing market has begun to slow. Although it remains high by historical measures, the National Association of Realtors' Pending Home Sales Index fell 0.8 percent in February from the prior month and was down 5.2 percent year-over-year.

Housing is a critical component of the U.S. economy, Chan conceded, noting that over the past five years, 40 percent of employment growth has been attributable in some way to what's been happening in the housing market. Nonetheless, he sees no evidence of a housing "bubble" and projects that the current slowdown in the housing market shouldn't be sufficient to trigger a recession. Historically, that has happened only after housing sales have fallen by 25 percent to 35 percent, he said. By contrast, Chan is looking for a slowdown of only 5 percent to 8 percent.

Even the recently inverted yield curve in the bond market-it had reverted to a modestly positive curve by the time Chan spoke in April-isn't a harbinger of recession, Chan said. He said short-term rates historically have had to climb about 28 basis points above long-term rates before an inverted yield curve prefaces an economic slump.

Factoring in all the variables, Chan said he expects the economy to grow somewhere between 3 and 3.2 percent this year, as measured by real Gross Domestic Product. He also expects inflation, as measured by the Consumer Price Index, to rise about 3 percent year-over-year. He expects returns of about 4.2 percent for the Standard & Poor's 500 stock index and returns of 4.75 percent to 5 percent for the 10-year Treasury note. He predicted this will mark the fifth consecutive year in which international equities outperform domestic equities.

Read Next: Automating the 401(k) Plan: Providers Say It May Be the Key to Success