US consumer spending and services failing to pick-up this year will raise the risk of recession, warns JP Morgan chief market strategist Stephanie Flanders.
Flanders says there is more focus on US consumption issues than previously, with it being a key indicator of global health.
“The focus of investor attention has shifted since January. While it was previously manufacturing weakness that was causing concern, now it is the recent softening in services and consumer spending that is causing concern,” says Flanders.
Last week’s figures from the US Federal Reserve showed consumer spending, which makes up more than two-thirds of US economic activity, edged up just 0.1 per cent in February.
January’s growth in consumer spending was also revised down to 0.1 per cent from the 0.5 per cent growth previously reported.
Flanders says: “We didn’t think the slowdown in manufacturing was going to cause a recession. However, the divergence between manufacturing and services in the US was wider at the end of last year – but this is not the case anymore.
“The reassuring thing in the weakness in services is the reflection of the fact that these services are those supporting manufacturing, such as transportation.”
Flanders says the only engine for the recovery in developed markets will continue to be consumption.
She says: “The story around consumption growth being key for recovery is still in place.”
Flanders adds that equities have become “disconnected” from the US economy and its performance, meaning investors should focus on liquid alternative strategies for higher returns.
She says: “The trade-off between risk and reward for equity is less attractive now. Our team now overweights high yield because high-yield credit is now priced for bad news, like a recession. Investors should buy assets already priced in for bad news.”