Richard Woolnough: No Looming US Recession

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According to hedge fund manager Richard Woolnough, manager of the $24 billion M&G Optimal Income fund, the United States is not approaching a recession. In fact, he argues the strong labor market is likely to lead the U.S. Federal Reserve to keep edging interest rates up over the near term.

Keep in mind that when Richard Woolnough speaks, people tend to listen very carefully, as he is one if the very few financial professionals who correctly foresaw the 2008 Financial Crisis before it unfolded.

Recent comments from Richard Woolnough on global economy

Woolnough recently spoke publicly, and he was clear that he did not see a recession on the horizon in the U.S. Woolnough noted: “There is currently a lot of concern regarding the US economy and its ability to withstand the collapsing price of oil and mined commodities, the Chinese slowdown, and the recent quarter (yes, quarter) point rate rise – or given the current market mood, its ability to cope with a doubling of the Fed funds rate! Whilst high yield spreads are close to recessionary levels, this is skewed by the energy sector. The manufacturing side of the economy is in clear decline, but the services sector is more significant for US growth and is performing much better  The US yield curve is some way from being inverted, which has historically signalled recession, although it has been flattening and needs to be steeper. We think the Fed remains on track to continue raising rates as it should be focused on the data that points to a strengthening labour market.”

He extended his argument, saying: “If the outlook from an economic and industrial output perspective were grim then companies would be shedding labor in the most traditional manner, by firing people. The private sector is firing the lowest percentage of the working age population in the past 15 years. This is a sign of continued labor market strength, and the low level of job cuts points to a continuing trend of healthy employment numbers.”

The fund manager then moved on to explain “natural unemployment”, pointing out it is inevitable that there will be some employee turnover whether in a boom or a recession. He went on to argue that the natural rate is around 0.02%, so the U.S, labor market “continues to look strong.”

He concludes his argument by saying: “If the US economy was going to be pushed into recession then surely we would have had some signs by now, because oil has been in a bear market for more than a year, the Chinese stock market in a bear market for nine months, the mined commodity market in a bear market for two years, and the minor move in rates was fully anticipated (and delayed).”

Fed’s mandate is to support the labor market, not the stock market

Woolnough also emphasizes that the role of the Fed is to support the labor market, not the stock market. He notes that while low oil prices give the economy a boost, declining commodity prices are a supply, not a demand, issue. He also says to remember that the Chinese economy is really only a minor impact on the U.S. economy, and interest rates remain very low.

He argues the Fed should (and probably will) focus on important economic indicators in making its decisions about whether to notch interest rates up another quarter point or half point or not: “The stock markets, commodity markets, and the economy do not always move in tandem. The Fed should not focus on these indicators. Its mandate is not to support the stock market or the commodity market, but to support the labour market. The Fed should therefore remain vigilant, and not get sidetracked by noise that has little effect on the long term outlook for inflation, or the short term outlook for the labour market.”

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