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Pollack: A stimulating economic picture

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August 12, 2019

The Monday Morning Quarterback 

A quick analysis of important economic data released over the last week

Central banks around the world are trying to stimulate their economies.  The FED has cut rates.  The European Central Bank made it clear that rates are headed lower.  The Bank of Japan is taking similar actions.  China made the Yuan cheaper. 

And globally, more than $14 trillion in bonds are trading at negative interest rates.  That’s right.  You invest in a bond that pays you back less than what you invested. 

In addition to low and declining interest rates that make investing in bonds less attractive, equities are near record highs.  No wonder gold has done so well recently.  

How will it play out?  If economies stabilize, then gold might lose some of its luster.  But, if a recession does occur, the very thing that central banks are trying to avoid, then the run could continue.  A recession in the near future would create a perilous situation.  Inflation is already lower than central bank targets.  A recession could push inflation lower.  Debt deflation would be a mess as those who owe money would have to pay it back with more expensive money instead of “cheaper” money as occurs during periods of inflation.  Also, most central banks don’t have much cushion in the form of lowering interest rates than in previous cycles.  But don’t panic.  It’s tough to bet against central banks at the moment.  Certainly though, risks are higher than anyone would like.

Meanwhile, back in the U.S., most economists believe that the economy will continue to grow.  The current 2019 forecast calls for real GDP growth to continue this year.  Next year, while the consensus calls for slower growth, it is still positive.  As of this month, just 21.4% of the panel believes there will be a recession this year and 36.6% believe there could be one next year.  Are there things to worry about?  Clearly.  The yield curve (10 year less three-month government instruments) is negative.  The Fed of New York recession indicator is now at levels that have to raise eyebrows.  And corporate profits, while high, are declining as a percent of GDP. 

On the other hand, the unemployment rate is still declining.  There are more than seven million unfilled jobs in the U.S.  Housing starts are not yet signaling a significant problem.  And leading indicators are still rising, albeit slowly. 

So, it’s late in the game.  But, while deficits and government debt around the world are still rising as they have been for years, the major dislocations that would cause a significant slowdown in the U.S. economy do not appear to be in play.  And not all recessions are the same.  So, at this point, if one were to occur, it would likely be mild and short.  Let’s hope the current trade skirmish does not escalate into a serious trade war.  The timing would not be good.

U.S. Snapshot:

The Blue Chip Consensus forecast believes that real GDP growth this year will be 2.4%.  This is down from 2.5% last month.  For 2020, the consensus forecast call for growth of 1.8%.  That would be the slowest rate of growth since 2016.  The 2020 consensus is the same as last month.  Only three of the 49 participants in the panel are expecting a recession this year.  That averages out about a 21.4% possibility of recession.  The expectations rise to 36.6% for a 2020 recession.

Job openings in June were basically unchanged from May but hiring did soften and now flat at about 5.7 million.  Separations did decline modestly to just under 5.5 million.  Thus, an increase in net employment.  Currently, there are 7,348,000 job openings in the U.S.

The ISM’s non-manufacturing index in July stood at 53.7.  This is down from 55.1 in June and 56.7 a year ago.  Keep in mind that any reading above 50 indicates that the non-manufacturing sector is still expanding.

Consumer credit increased 4.3% at an annual rate in June and is now 5.3% above a year ago.  Revolving credit (mostly credit card debt) declined 0.1% at an annual rate and is up 4.6% from a year ago while non-revolving debt (mostly student loan and auto debt) was up at a 5.8% annual rate and is now 5.6% above a year ago.

30-year fixed rate mortgage rates decline to 3.60% the week of August 8th.  This is down from 3.75% the week earlier and a month ago.  This is the lowest that mortgage rates have been since late 2016.

Arizona Snapshot:

According to the Cromford Report, active listings in the Phoenix multiple listing service fell to 19,535 in July. This is down from 21,386 in June and 20,432 a year ago. Resales were 9,325 in July compared to 9,483 in June and 8,543 a year ago. Thus, the months of supply continues to decline.

About EDPCo

Elliott D. Pollack & Company (EDPCo) offers a broad range of economic and real estate consulting services backed by one of the most comprehensive databases found in the nation. This information makes it possible for the firm to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. Econometric modeling and economic development analysis and planning are also part of our capabilities. EDPCo staff includes professionals with backgrounds in economics, urban planning, financial analysis, real estate development and government. These professionals serve a broad client base of both public and private sector entities that range from school districts and utility companies to law firms and real estate developers.  

For more information, contact –

Elliott D. Pollack & company
7505 East Sixth Avenue, Suite 100
Scottsdale, Arizona 85251

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