There are lots of negative forces pressing against U.S. financial markets and gnawing angst about whether a recession is nigh, but the U.S. consumer right now is the best defense against a disastrous downturn, says one economic forecaster.

“Our economy doesn’t have a recession without the consumer contracting,” said Lara Rhame, chief U.S. economist at FS Investments, who spoke at the Inside Alternatives & Asset Allocation conference hosted by Financial Advisor and Private Wealth magazines in Philadelphia on Tuesday. She painted a picture of why she doesn’t think that scenario is in the cards, even as she detailed some of the forces that could constrain growth.

Rhame’s presentation was structured to be a survival guide to a global slowdown; as such she discussed slowing global growth and its potential impact on the U.S. She noted the International Monetary Fund expects global growth to be 3.2% this year, or the slowest rate since 2009.

“We can look to Germany and Europe where growth has slowed much faster than I expected at the beginning of the year,” said Rhame, whose firm is a Philadelphia-based alternative investments manager. “This is going to be a headwind for our economy somewhere.”

She added that while this headwind won’t be enough to blow the U.S. economy off course, that’s not to say our economy is impervious to other nations’ plights or, for that matter, won’t feel an impact from global trade wars or from internal matters such as the upcoming presidential election or other structural economic issues.

“When we look at the data of U.S. business sentiment, we’ve seen services sector sentiment has fallen and manufacturing business sentiment has turned to pessimism,” Rhame said. “Even though manufacturing is a shrinking sector in our economy that doesn’t mean it’s not still widely watched.”

Rhame noted the current U.S. economic expansion–while slower than past post-recession expansions—remains on decent footing.

“While there’s a lot of concern because we are slowing down, so far we’re actually doing fairly well,” she said.

And that brings us back to the American consumer, and the fact that about 70% of our economy is linked to consumption. 

“Whether or not our expansion lives or dies is up to the household,” Rhame said, adding that the good news is there are a lot of fundamental positives supporting the consumer.

“I put jobs right at the top of the list because uncertainty from slower growth abroad has a much bigger impact on business investment or business sentiment than it does on the U.S. household,” Rhame said. “The U.S. household is primarily concerned with what I call the front lawn.” That pertains to aspects such as jobs and wages.

Rhame said jobless claims is one of her favorite leading indicators of recession. “When initial jobless claims start to meaningfully rise, we usually get a recession 12 to 18 months later,” she explained. “These are newly unemployed people asking for unemployment insurance. One of the reasons why I’m not worried right now about a recession this time next year or even a year and a half from now is because initial claims today are still the lowest we’ve seen since the 1960s. And they are even lower than that when adjusted for population growth.”

And Rhame indicated the amount of household leverage is another encouraging sign. ”The household has actually been the most responsible sector [regarding leverage] through this expansion,” she said. “Household leverage is lower now than it was before the last recession, and even going back in the ‘90s.”

“To me,” she continued, “it says that even though we’re seeing uncertainty creeping into the outlook from policy and slower growth abroad, the household is better insulated to weather some of that uncertainty.”

Yield Curve And Politics

Rhame acknowledged there’s a lot of concern about yield curve inversions where short-term U.S. Treasury bonds pay more than long-term bonds. An inverted yield curve happened in August, and in the past such inversions have often—but not always—preceded a recession. She said doesn’t think the recent inversion portends a recession because U.S. interest rates are being dragged down by the decrease in global growth expectations abroad.

“It’s not the classic yield curve inversion where the Fed was raising rates and pushing up short-term interest rates,” Rhame said.

But she did note that the unfolding presidential election season could throw the economy and financial markets a curve ball.

“I think the 2020 elections will be more disruptive for the financial markets than perhaps other forecasts I’ve seen out there,” she said, adding that it could pull down economic growth to just 1.5%, or even produce a negative quarter of growth.

“Even if it’s an environment that won’t give us a classic recession, it will still give us a lot of market volatility,” Rhame said.