All of a sudden, the very same economy that has been chugging slowly along since about 2010 is described, seemingly everywhere, as being in a “boom.”
White House economic council chief Larry Kudlow thinks so, but he always does when Republicans are in charge. But even people who should know better, like New York Times columnist Tom Friedman, are falling into the trap.
Even some at the Federal Reserve, apparently, even though the Fed’s most-recent Beige Book report used typically-beige language, calling growth “moderate.”
But they shouldn’t be so upbeat. And neither should you.
Because almost no indicators that matter much point to an acceleration in growth that lasts past the small pop provided this year by the corporate-and-rich-folks tax cut. And a number point to a slowdown by late 2019.
The risk is that people will lose their minds: The Fed, by raising interest rates too quickly, and the average investor, by overstaying a bull market driven by an expansion whose waning is on the horizon.
Read: Here’s how the Fed’s statement, dot plot and forecast may shift
Stripped to essentials, the economy had one strong quarter of growth in gross domestic product — and, coupled with strong consumer confidence figures and prospects for a strong third quarter, some commentators abandoned a decade of caution prompted by the hangover from 2008’s financial crisis.
So let’s drill down on these numbers, shall we?
Take consumer confidence first, since consumer spending is about 70% of the economy.
Yes, the confidence numbers look good on the surface. In the University of Michigan’s most recent index, consumer confidence in September was 6% higher than a year ago, registering 100.8 on a scale where 100 equals the confidence level that prevailed in the mid-1980s. About three-quarters of this year’s gain came between August and September, potentially (at least) in reaction to the second-quarter GDP report.
But confidence numbers are being driven by people’s political ties — as has been the case throughout the Trump presidency. In a Sept. 21 report, Richard Curtin, who runs the Michigan survey, begins with these words: “An unprecedented partisan divide in economic expectations occurred following President Trump’s election, and those differences have persisted unchanged for more than a year.”
Put simply, Republicans think the economy is great — much better than two years ago, despite the data that says it’s about the same. Democrats think it’s significantly worse. Independents’ view of the economy has improved, but their view of future conditions is in the middle of historical ranges. Which is closer to the truth.
And, a reminder: Consumer confidence peaked in February 2000, right before the dot-com bust. Today’s levels are close to those in early 2007, as a recession was nearing.
Read: Conference Board says consumer confidence surges in September to 18-year high, near all-time peak
If you’re thinking the tax cut will drive growth for years, a lot of economists (and Wall Street analysts) think you’re wrong. Odds that some kind of slowdown will come by 2020 are rising: Moody’s Analytics expects 3% growth this year, slowing to 0.8% in 2020 as Trump’s tariff wars with China and other trading partners escalate.,
“With or without the tariffs, we are headed for a significant fiscal hangover in 2020,” Moody’s economist Ryan Sweet said.
Similarly, this year’s 22% growth in profits at S&P 500 companies like Boeing BA, +0.32% Walmart WMT, +0.74% and Apple AAPL, +0.56% is expected to slow to just 10% next year, when there’s no tax cut, according to CFRA Research. Estimates for 2020 aren’t available yet, but if Moody’s is right about the growth stall, then profit growth will likely be small or even negative.
Plus, job and real income growth are both slower than they were two years ago, though the unemployment rate is lower and incomes are a little higher than then. Note, too, that the jobless rate has been coming down more slowly lately. Since Trump’s election, it has fallen 0.7 percentage point in 21 months. Not bad, but not accelerating either. In the middle of the decade, it dropped by a percentage point or more per year for three years.
And of course, Trump has made much of the stock market’s gains, since the S&P 500 SPX, +0.11% returned 22% last year (including dividends) and is up 9.2% this year. But since the market tripled between its early-2009 lows and when Trump took over, these years are pretty ordinary; 2017 would have been the second best of Barack Obama’s presidency and this year, time of the supposed acceleraton and boom, would be the third worst.
So, what can go wrong? People and policy makers can both get overconfident, and overexpose themselves.
The Fed’s overconfidence would show in the pace of interest rate hikes, beginning at this week’s Open Market Committee’s meeting. Futures markets expect the Fed to raise rates three or four times by mid-2019, reflecting the excessive faith in the expansion that has gripped American stock markets recently.
It’s not as if warning signs aren’t visible. Housing is slow enough that Bank of America Merrill Lynch economists called a top to the housing expansion last week. Even with most consumers locked in to cheap mortgages and car loans, rising rates will raise the cost of servicing their debt at the margins, and hamper home buying in particular. And JPMorgan Chase economists point to the political risk of Trump’s America — that, bolstered by good short-term news, Trump will overplay his hand on Iran sanctions, trade talks with China or Canada, or someplace else.
Read: Don’t blame imprudent household borrowing for the next recession
So the watchword should be caution. My prediction for this year was that the S&P 500 would reach 3,000; at 2,919 at Monday’s close, that’s not looking bad. But there’s not nearly as much good news in the pipeline as there was when I wrote that.
Read: The Powell Fed can make history if it can slow the economy without crashing it
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