Kicking The Can Down The Road

With the recent acceleration in economic growth, the new trend is analysts at the major investment banks pushing off their recession prognostications by a year or two. When the economy falters, it’s very easy to call for a recession because this cycle is about to be the longest since 1854. When the economy accelerates, economists see the writing on the wall and push off their recession predictions. They realize that it’s difficult for growth to go from above 3% to negative in a few months. We’re still over a year away from the late 2019 recession calls which were popular a few months ago, but economists don’t want to be caught bearish in 6 months with the economy currently doing well.

If you think the economy will fall into a recession in late 2019, it’s reasonable to start being more conservative soon. Stocks can peak over a year before a recession occurs such as in 2000. To be clear, I’m concerned about the timing of the recession, not how deep it will be. Figuring out how bad it will be is meaningless until we are in it. Would you not sell if stocks were only going to fall 25% in the next recession? No, if you could predict that bear market, you would try to avoid it.

No Recession Until 2021

In a previous article, I mentioned how many on Wall Street think the economic growth may have peaked in Q2 and now I’m discussing how analysts have pushed their forecasts for a recession further back. This is simply a reaction to the data. It’s possible to think growth will slow from 3.7% without expecting a recession. As you can see in the chart below, the economic growth in 2018 is expected to be above 2.75%. It’s expected to be below 2.75% in 2019; in 2020 the consensus is divided, but the most popular range is from 1.25% to 2.75%.

On Thursday, a prominent forecaster named Byron Wien claimed he was outside the mainstream because he expects a recession to not occur until 2021. I think this is simply a representation of someone getting ahead of the flood of analysts who quickly will be all changing their calls in the next few months. Watching forecasts is confusing because some analysts come up with a forecast based on current trends and simply say there’s outsized risk of a recession in a certain period. Therefore, they have two forecasts. I’m still expecting a recession in 2020, but I’m not making any trades based on this call because it’s too far in advance. In 2019 when the economy looks like it’s weakening and the curve has inverted, I’ll be looking to take risk out of my portfolio.

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Labor Market At An Unprecedented Level

The biggest story on Wednesday was the JOLTS report which showed the number of job openings exceeded the number of unemployed people for the first time since the JOLTS started being reported 20 years ago. We’re at the point in the cycle where some are starting to question if the job openings are legitimate. To be clear, there are sometimes openings where companies don’t make an effort to fill them. It’s tough to determine the cyclicality of these reports because I don’t have the data on that. However, there are always those types of jobs in the market. The fact that people are focusing on them signals to me that the labor market is entering a tight phase.

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One concept being discussed now because wage growth is expected to accelerate is that wage growth might not push profit margins lower. If wage growth causes spending to increase, revenues increase further. Therefore, recessions occur when lending growth is hurt by higher rates not because profits are hurt by increased wages. Usually wages and rates increase at the end of the cycle, but this time we just have wage growth which means there might not be a recession. There will only be one when the financial system is stressed and loans become more difficult to acquire.

GDP Nowcast Lowers Estimate

In its Wednesday update, the Atlanta Fed’s GDP Nowcast was lowered from 4.8% growth to 4.5% as you can see in the chart below. The estimate for real consumer spending growth and real private nonresidential equipment investment growth fell from 3.5% and 6.1% to 3.3% and 4.3%. Even 3.3% growth would be a big acceleration from the 1% growth last quarter. The bears are chomping at the bit to claim the Atlanta Fed Nowcast is wrong, but it remains optimistic and is still above the initial estimate for 4.1% growth. The bears would be wrong if they claim the Nowcast was wrong if it falls because that would simply be because the data changed. The Atlanta Fed isn’t forecasting how the economy will do in May and June. It’s saying this is what the growth will be based on the data we have now.

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Trade Deficit Narrows

The BEA report caused the contribution of net exports to fall from 0.42% to 0.31% in the Atlanta Fed Nowcast. The trade balance actually came in better than expected as the deficit for April was $46.2 billion which is better than the top end of the consensus which was for a $47.6 billion deficit. There was a big dip in smartphone imports as they fell $2.2 billion, bringing down the consumer goods deficit by $2.8 billion in April. Even though the deficit fell from $49 billion, the deficit with China increased $2.1 billion to $28 billion. That might irk Trump as America negotiates a trade deal with China. The imports of iron and steel mill products were up $228 million to $2.1 billion and the imports of bauxite and aluminum were up slightly to $1.5 billion. It seems likely that this will reverse as the tariffs take hold. The narrowing of the trade deficit will help the GDP report even though it caused the Nowcast to be lowered.