What’s Behind the Risk-On/Risk-Off US Economy?
The US economic recovery is progressing in fits and starts. Short-lived “risk-on” periods, when companies and consumers invest more, seem to constantly give way to “risk-off” periods, with anxiety and fear restraining economic activity.
I think the choppy growth trends may have been triggered by a big change to business behavior since the financial crisis of 2008. In the past, companies would react to adverse events. These days, companies seem to be restraining spending, investment and hiring in anticipation of economic challenges.
During the first half of 2012, companies grappled with two potential risks: the impact of a possible Middle East conflict on oil prices and a breakup of the euro. Neither fear was realized, but companies still tightened their belts.
In June, Manpower, a global staffing firm, reported that only a fifth of US companies planned to hire in the third quarter of 2012. Manpower CEO Jeff Joerres said macroeconomic uncertainty was to blame. “Every time it’s safe to go back in the water, a storm blows up again,” he said.
US manufacturers have been cutting their inventory positions as perceived risks grow and then rebuilding stock quickly when the dangers appear to wane. Several companies have reported delayed orders in June, the same month that a manufacturers’ survey showed US companies feared potential fallout from the unfolding crisis in Europe.
I don’t think it is a coincidence that in June, the ISM composite index for the US manufacturing sector fell 3.8 percentage points to 49.7, the first reading below the all-important 50 point threshold since the recession ended in June 2009. About two-thirds of the decline was driven by a 12.3 point sharp in the New Orders Index—one of the biggest monthly declines in 30 years. In the past, sudden and sharp declines in the New Orders Index followed a major event or an abrupt change in the business environment. But last month’s decline appears to have come in anticipation of a euro break-up.
Declines comparable in scale to that of June 2012 occurred in 1980 and October 2001 (Display). The New Orders Index fell 11.8 points in April 1980, the month after President Jimmy Carter imposed credit controls that led to a sharp collapse in US sales and production. Later that year, the New Orders Index plunged 14.1 points, following a sharp hike in the federal funds rate in November. In October 2001, the index dropped 12.4 points after the 9/11 terrorist attacks on the US.
In our view, what happened in June 2012 was fundamentally different: it reflects a sea change in how manufacturers prepare for risk. Rather than waiting to see how events played out in Europe, with the Greek elections and the EU summit at the end of the month, companies took precautionary steps to protect operations against a potential sharp deterioration in the business environment. American companies are still facing the uncertainty of the fiscal cliff at the beginning of 2013, when significant new taxes are set to kick in.
We think there are two key takeaways here. First, in a risk-on/risk-off economy, investors and analysts must be much more dynamic in adjusting growth forecasts. Second, politicians and policymakers must become much more aware of the damage caused by lingering uncertainty, and do everything in their power to provide clarity on major economic issues.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Joseph G. Carson is US Economist and Head of Global Economic Research at AllianceBernstein.