Last Updated: January 19, 2016

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One of today’s more contentious debates centers on where the U.S. economy is headed. To some, the economy remains on an upward track, despite softness in some areas. To others, activity looks to have peaked, and the Federal Reserve’s December initiation of a tightening cycle–discussed here, here and here–is the straw that broke the expansion’s back.

One particular source of optimism is relative strength in the labor market, which many view as a sign that all is well. Citing data featured in the chart below, Quartz notes that “Americans are creating jobs faster than they’re hiring for them.”

U.S. Labor Market Turnover Rates

Another chart at Real Time Economics shows that while wage growth remains below where it was in prior decades, the trend appears to have bottomed, with the annual change in average hourly earnings approaching five-year highs.

Wage Growth Since 1985

In fact, the Korn Ferry Hay Group 2016 Salary Forecast projects that employees in the U.S. will see 2.7% wage growth this year, which, if it comes about, would put the trend above the top of that range.

‘No conclusive evidence’

According to Economist Tim Duy, various employment-related statistics suggest there is no “conclusive evidence of an impending recession in manufacturing, let alone the overall economy.” He says that manufacturing “quits,” which would likely be declining if recession was imminent, remain in an uptrend, as illustrated in the first chart below. He adds that initial jobless claims data, highlighted in the second chart, does not indicate–for now, at least–that workers are being let go in anticipation of a downturn.

Quits ManufacturingInitial Jobless Claims

While Duy allows that one may well be in the offing, he suggests it will take “a year to evolve.” He sympathizes with the view that “the economy has evolved into a mid-late to late stage of the cycle, and [that] the transition and associated uncertainty results in some not-surprising volatility in financial markets.”

Other data bolsters the claim that the economy is doing fine. Business Insider highlighted research by Deutsche Bank that suggests consumption is too robust to be foreshadowing a decline in activity:

In the 12 months leading up to each of the past five American recessions, annual auto sales growth was negative in at least eight months. No single such month so far. And cheap oil keeps those wheels turning. Growth in miles driven, which typically collapses before a recession, is near a decade-high. It’s not just cars Americans are getting around in – planes were also 85% full in December.

Business Insider also pointed out that consumer spending, broadly speaking, began to roll over roughly a full year before the last recession struck, as illustrated below.

U.S. Consumer Spending

Reasons for caution

Still, there are reasons for caution. According to the CNBC Fed Survey, “the chances of a recession in the U.S. are at their highest levels since the fall of 2011.” Moreover, citing research by money manager Martin Fridson, Bloomberg reported that the junk-bond market is indicating a 44 percent chance of a recession in the U.S. within one year.” A chart featured at The Week reveals that high-yield spreads have climbed steadily over the past 18 months, reflecting concerns about riskier parts of the economy.

High Yield Spread

One strategist, Societe Generale’s Albert Edwards, maintains that the divergence between the weakening ISM manufacturing index–which is currently below the dividing line between expansion and contraction–and the still-resilient ISM services counterpart, is not a good sign:

When an economy is hurtling towards recession it is almost always the manufacturing sector that takes the less volatile services sector by the hand and leads it into a recessionary underworld.

ISM Manufacturing vs. Services

Tracking below forecasts

Investment manager Jeffrey Gundlach also believes that the economy is vulnerable. Among other things, he notes that one leading indicator, the Atlanta Fed GDPNow forecast model, has been tracking below consensus forecasts for some time, suggesting that growth is not on a firm footing.

Atlanta Fed Q4

Over time, Gundlach points out, the regional Fed bank has been among the most accurate predictors of U.S. gross domestic product.

Atlanta Fed vs. GDP

Some anecdotal evidence also supports the notion that things are in worse shape than they appear. The CEO of railway operator CSX Corp. said in a recent earnings call that he hadn’t seen the kinds of pressures the company was facing in so many different markets outside of a recession–in fact, he described it as “a spring recession.” Separately, a new study from the National Association of Counties found that “93 percent of counties in the U.S. are still struggling to recover from the Great Recession.”

Other factors

Weighing all the evidence, it would seem that the pessimists are more likely right than not. For one thing, employment has historically been a lagging indicator, so the notion that a resilient labor market is bullish might not be the most compelling argument. The sharp decline in oil and other commodities, which has been blamed on global oversupply, likely also reflects tepid demand, especially from China, the world’s second largest economy.

In sum, the risks are to the downside.

Michael Panzner

Michael J. Panzner is a 30-year Wall Street veteran and the author of three books, including Financial Armageddon, which predicted the 2008 global financial crisis.