Despite a roaring US economy, everywhere you turn media talkers and liberal economists jabber about “recession.” Let’s look at facts – because they matter. They tell the real story.
Are we on the brink of recession? Hardly. Mainstream media mutters about declining fixed investment, equipment purchases and slowing business optimism – adding a healthy dose of know-it-all “inverted yield curve” recession talk. Really?
In the past two and a half years, we have seen record economic growth, the lowest unemployment in 50 years, rebirth of labor participation, labor productivity, wage growth, consumer confidence, and stock market gains.
We saw pent-up demand for “non-residential fixed investments” go sky-high to accommodate Trump growth, from negative three percent in 2016 to over 10 percent in 2018. Today, it remains positive. Same with “goods-producing equipment,” which stood below half a percent in late 2016, then jumped to nearly 3.5 percent by late 2018. Today it has settled at two percent –four times the end of Obama’s tenure.
Signs of recession? No, since these investments now produce goods. Economic growth first quarter 2019 was 3.1 percent, second quarter 2.1 percent. By contrast, growth at the end of 2015 under Obama? Less than one-tenth of one percent. Anyone talking recession then? No. At no time did Obama’s growth match Trump’s four quarters above three percent in the first two years.
On business confidence – take a look. The “small business optimism index” stands at a whopping 105, revealing enormous confidence in the future. It blasted to 109 a year ago – but never moved beyond low-to-mid 90’s under Obama. The month Trump won, it jumped to 106. At no other time in the history of the index has that happened. In June 2019, the National Federation of Independent Business (NFIB) ran the headline: “Small Business Optimism Roars Back, Rivaling Historic Highs.” So, no cigar there.
What about that magical “inverted yield curve?” Simply put, this curve shows long-term bond rates lower than short-term. Does it matter? Maybe not. Economists say an “inverted” yield curve “means” a recession. With a graduate degree in economics, please allow me to share a secret. Economists are remarkable – at predicting the past, not so much future.
The so-called Phillips Curve was supposed to be ironclad: When unemployment fell, inflation rose. Until Trump reduced regulation, signed the largest tax cut ever, rebalanced trade, ignited fallow factory capacity and pulled workers off the bench. Result? Record unemployment, no inflation. Phillips curve dead.
How about the economists who predicted US wages would never grow again, US labor participation would continue falling, minority unemployment unsolvable, America’s demographics doom and gloom? All wrong.
So here we are, told this magical inverted yield curve ends our bull market. Maybe not. Why not? The yield on both curves – long and short – is still positive, margin is narrow. Moreover, it comes and goes. Nothing exists to say inverted interest rates create a recession. Correlation is not causation, and even the bandied correlation is distant, lagged and unclear.
Second, the curve does not account for higher economic volatility, which means people may factor into long-term rates expanding craziness. Or they may fear what happens after Trump, after pro-growth policies – if he does not win reelection. They may fear his leaving, not his staying. Long term rates could pop if reelected, suddenly inverting the inversion.
Third, global economic uncertainty is high – Brexit, shaky European Union, protests in Hong Kong and Russia, bouncing oil prices, Persian Gulf turbulence, unresolved China accord, unpassed US-Mexico trade agreement, Venezuelan disintegration, Arab-led anti-Israeli boycott, socialists running for US President. The US economy is part of the global economy, but volatility can invert a yield curve – without recession.
Fourth, psychology affects the market – and is hard to predict. Peoples’ fears wax and wane, often in herds. What people imagine the Federal Reserve will do, how fast, at what level affects perceived future rates. People can be wrong – never more than economists. So, the rate disparity reflects more unknowns than knowns – as many support prosperity.
Fifth, on the plus side, people can have heightened confidence in the near-term, expecting better near-term returns – without condemning positive growth in the longer-term. They might foresee opportunities tied to a ribbon on the China and Brexit deals, restored border security or softer monetary policy. That would lead them to expect more now than later, paying more for high growth, rather than lower growth. But planning growth does not mean recession – If it did, we could class Obama’s eight slow-growth years a recession. Liberals do not take that view.
Sixth, other factors reduce faith in the long term – inverting the curve – beyond recession. Inflation could rise in ten years, job growth wane once at full employment, or a loony-bin win the presidency with growth-killing socialism. Lots of fears can lower expectations in long-term returns, beyond a recession.
In all events, predicting recession from an inverted yield curve is like making investments on your lucky (or unlucky) number or horoscope. The Phillips Curve might return – or maybe not.
What we know is that US growth has seldom been better – a blessing for all Americans. We know economists are often wrong. We know fancy words bedazzle the media, and “inverted yield curve” is extremely exciting to say. It is implied knowledge few have, made more exciting when uttered with the politically laden word “recession.”
Come to think of it, maybe we should have an inverted political yield curve – asking why so many have more faith in this president than longer-term prospects under a socialist. Could be the return on capitalism is higher than ever, socialism a no-go. Simpler, Winston Churchill once observed, “When the eagles are silent, the parrots begin to jabber.” And so, they are.