Bob Baur
A 2020 US recession
“According to the June 11 business section of the USA Today, many experts say in 2020 for the United States. If it happens, it would be the first time such a forecast came true; recall that economists in general have predicted zero of the last seven recessions. The stock market is no better, predicting twelve of the last seven recessions, as the old saw says. Even former Fed Chair Bernanke joined the forecasting chorus, quoted by Bloomberg writer Craig Torres on June 11 noting that the U.S. economy will go off the cliff in a “Wile E. Coyote” moment in 2020.
“The thinking is not unreasonable. After the second longest US expansion in history, it is late in the business cycle, so a recession will likely come sooner than later, but it’s too soon to tell. None of the 19 indicators in our proprietary Recession Dashboard are flashing a warning. In fact, the United States has decoupled from a modestly slowing world economy and its accelerating domestic demand is helping propel global growth.”
Did the Fed turn hawkish?
“Following the June 12-13 Fed meeting, Jerome Powell told media ‘The decision you see today [raising the fed funds rate (FFR) by 0.25%] is another sign that the US economy is in great shape. Growth is strong. Labor markets are strong. Inflation is close to target.’.
Pundits thought this was a hawkish move. Committee member median estimates of the year-end 2018 FFR rose 0.25%, implying four hikes this year. And the forward guidance about the FFR staying below neutral for some time was removed from the statement. However, Powell discouraged hawkish analyses.
“After a near decade of a super-low FFR, the Fed is simply trying to move policy back to neutral without paralysing financial markets. The Fed will stay very gradual, one or two hikes yet this year, depending on how the stock market handles another upturn in long-term U.S. treasury bond yields. The Fed is right to acknowledge the robust US economy. Keeping the FFR extraordinarily low for so long sent a message that the Fed lacked confidence in the economy; likely one reason why recovery from the crisis was so sluggish.”
In Frankfurt:
The European Central Bank (ECB) outlined plans to reduce its monthly bond purchases to €15 billion in the fourth quarter and end them at year-end. But, Eurozone growth decelerated markedly in the first quarter and the second looks little better, suggesting that ECB President Draghi wanted policy to stay easy. So, the hawks on the Governing Council had to compromise by promising to leave official interest rates at present super-low levels at least through the summer of 2019, or longer if needed for inflation to reach target. The euro plunged on that latter news from over 1.18 $/€ to under 1.16 $/€ in the last part of the trading session. The wide disparity between U.S. and Eurozone monetary policy could keep the euro under pressure.
World growth no longer synchronised
“There is a broad but modest deceleration of growth outside the US. Japanese GDP declined in the first quarter, but appears set for a rebound. Private consumption and net trade were both strong in April and orders for machinery surged. We’re sticking with our 1% to 1.5% growth estimate for 2018.
“Weaker May production and retail sales numbers from China show its gradual growth deceleration. Officials want to slow the growth of debt and curb some of the worst pollution. Neither project is friendly for growth. Further, the long-time one-child policy is showing up in slowing growth of the labor force; the pool from which the labor force is drawn has already shrunk for three years. We expect GDP growth to trend toward the low 6% range by the end of the year
“Any big bounce in the Eurozone will be limited after the surprisingly soft first quarter. Wage growth is still modest, however it has picked up, which suggests consumer spending may help push growth. Political upheavals in Italy, Spain, and now Germany have curbed confidence.”
By Bob Baur, Chief Global Economist
