Chip Somodevilla/Getty Images A funny thing happened on the way to the recession, which had been lightly penciled-in for sometime next year: the U.S. economic data showed a marked improvement.
From housing starts and home sales to manufacturing production and jobless claims, the economic news last week was upbeat, even as the Federal Reserve administered a second dose of monetary stimulus in as many months to offset the risks from slowing global growth and a trade war.
Does this mean we should table the forecast of a significant slowdown or possible recession in the U.S.? Is it time for the EMTs — in this case, Fed policy makers — to stand down?
Risks aren’t abating
Not yet, and probably not anytime soon.
For starters, one month does not a trend make. Economic indicators ebb and flow from month to month in normal — i.e. neither boom nor bust — times.
What’s more, the risks that the Fed acted to offset last week aren’t abating. Europe is teetering near recession, China and India are experiencing slower growth, and the U.S.-China trade war is unlikely to be resolved anytime soon.
For the moment, however brief it may be, economic data releases have been beating forecasts, which lifted the Citigroup U.S. economic surprise index to an 18-month high. The improved tone of the data was validated by the sudden, sharp rise in long-term Treasury yields, which pared the inversion of the yield curve.
Better news
Just to recap last week’s economic news: Housing starts climbed to pre-recession levels, along with permits. The pace of single-family starts was the highest since January. And the number of existing homes sold was the highest in over a year.
While residential investment isn’t a large share of gross domestic product (3.7% in the second quarter), it has been a drag on economic growth for the last six quarters and in eight of the last nine, even with rock-bottom mortgage rates, solid employment growth and rising wages.
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Also encouraging was an increase in manufacturing production in August after consecutive declines in the first and second quarters of the year. The weakness in U.S. manufacturing is mirroring a global trend.
Not all of the recent economic news has been good, however. While IHS Markit reported on Monday a modest increase in its flash manufacturing and services indexes for September, there were warnings beneath the surface.
“The overall rate of growth in September remained among the weakest since 2016, commensurate with GDP rising in the third quarter at a subdued annualized rate of approximately 1.5%,” said IHS chief business economist Chris Williamson.
Jobs are being cut for the first time since 2010, and firms’ expectations for growth over the next year are “stuck at one of the most subdued levels since 2012,” according to the report.
Geopolitical risks
And don’t forget some big, geopolitical risks threatening the world economy: the U.K.’s potentially messy exit from the European Union; a possible crackdown by China in response to pro-democracy protests in Hong Kong; and a flare-up of tensions in the Middle East following the attack on Saudi Arabia’s oil production facilities.
None of the dour economic news in prior months prevented the stock market from scaling new heights. The Standard & Poor’s 500 Index SPX, +0.29% is close to an all-time high set in July amid negligible earnings growth, or even an earnings recession, in the first and second quarters, depending on how earnings are measured.
Some analysts think the stock market is on a “sugar high,” trading at levels that aren’t justified by the fundamentals.
Judging from day-to-day price swings, a more apt metaphor for the stock market’s performance might be that it is on a China-trade-war roller coaster, rallying with each new promise of renewed talks and plunging when those assurances are revealed to be mere palliatives.
The trade war has depressed business confidence and investment, with an increasing number of corporate chief executive officers and chief financial officers anticipating a recession next year. This can easily become a self-fulfilling prophesy.
Tariff threats
And don’t forget a U.S. president for whom tariff threats are his weapon of choice to pressure countries to comply with his wishes, even in areas unrelated to trade.
One final reason to remain cautious about the rosy scenario: the limited amount of ammunition central banks have in their holsters to address any signs of distress.
Some economists have started to question the effectiveness of negative interest rates. And deferring to fiscal policy, given conflicting attitudes toward tax-and-spend policy among European nations and the extreme politicization impeding implementation in the U.S., isn’t a reliable fallback.
Bottom line: It’s much too soon to assume the worst is over for the U.S. economy. Dangers lurk outside the U.S., not to mention domestic threats emanating from both ends of Pennsylvania Avenue in Washington, D.C.
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