Monday, June 5, 2017

Tim Duy: "Anxious About the Economy? It'll Still Set a Record"

This is the way the economy ends, not with a bang but a whimper.
Unless we get a really big bang from North Korea, Pakistan, Iran, the U.S, Russia etc.
Otherwise it's just boring old debt grows, growth slows, Hollywood blows, etc.


“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”
 -Ernest Hemingway "The Sun Also Rises" 1926

From Bloomberg Prophets, June 5:

The economy is far more resilient to negative shocks than bears like to believe. 
The current U.S. economic expansion is one of the longest on record. The longer it lasts, the more likely growth will become tepid and uneven, raising angst about its sustainability. See the May employment report, with its disappointing 138,000 gain in payrolls, downward revisions to previous months, and soft wage growth. Yet, at the same time, the unemployment rate fell to the lowest level since 2001. Anxiety is elevated with speculation that the Trump administration's pro-growth, fiscal stimulus plans are on the ropes.  

Don't be nervous. It might be a bit early to make this call, but I will make it anyway: I have trouble putting anything more than trivial odds on a recession in 2018, or even 2019. At this point, the best bet is that this expansion, which started in 2009, at least ties -- if not beats -- the current record of 10 years.

One important point to remember when evaluating recession calls is that the economy is far more resilient to negative shocks than bears like to believe. Consider that the economy survived the 1987 Stock Market Crash, the 1997 Asian Financial Crisis, the European Financial Crisis of 2011/2012, and -- possibly most important because of its domestic origin –- the 2015 Shale Oil Bust, without teetering into recession.

Also consider that assuming the Federal Reserve raises interest rates next week, there will have been four hikes totaling 1 percentage point in the rearview mirror, policy makers would have room to cut rates to offset negative shocks. That is enough room, for example, to match the Fed’s response to the Asian Financial Crisis.

The economy, however, has not proved resilient to excessive monetary action. Far more often than not, tightening cycles end in recession. This is where the yield curve comes into play as a recession predictor. During a tightening cycle, the impact of higher rates at the short end of the yield curve typically outweighs that at the long end. An inversion of the yield curve signals the tightening has become excessive, threatening economic growth. Generally, longer-term yields fall further, deepening the inversion, as market participants expect the Fed will soon begin cutting short-term rates....MORE
HT: Tim Duy's Fed Watch