The flimsy economic case for the market selloff

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Despite investor concerns, the U.S. economy is nowhere close to a recession

A screen above the trading floor of the New York Stock Exchange shows the closing number for the Dow Jones industrial average on Aug. 5.The selloff in equity markets is raising fears of economic troubles in the United States and the potential for a recession, but those concerns look overblown when compared to a bevy of indicators pointing to a firm expansion.

“I would say the U.S. economy is slowing, but it’s not contracting,” said Sal Guatieri, senior economist at Bank of Montreal, in an interview. “We’re not seeing clear signs that the economy is rolling over.” Dr. Sahm told The Globe last year that it’s possible her eponymous rule could send a false signal of recession, in the event that labour force growth exceeded the pace of hiring. “It’s not a law of nature,” she said. “It’s just an empirical pattern that works in the United States.”

“Even then, there is a big difference between the present and 1998: the absence of a major problem in, and risk to, the U.S. financial system,” he wrote in a client note on Monday. 10.2 per cent on Tuesday. Some analysts think a combination of macroeconomic and technical factors playing out in Japan may explain the broader sell-off around the world as much as souring sentiment about the U.S. economy.

These exchange rate moves have caused losses for hedge funds and other large investors engaged in the carry trade, prompting them to unwind positions, either to meet margin calls or rebalance the risk weighting in their portfolios. That has meant liquidating their holdings of U.S. and other assets to buy yen, and may be one reason for the aggressive selling seen in recent days around the world.

 

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