With the mid-year point rapidly approaching, I like to review my 2019 forecast and evaluate what I got wrong and what I got really wrong. Of course, all forecasts are wrong, but some are more useful than others. So far, it looks like I have been off just a little through 2019.
My forecast was of a slowing U.S. economy through 2019. I predicted growth to decelerate to 2.8 percent in the first quarter down to 1.9 percent by year’s end. The preliminary revisions to the first quarter GDP growth data are 3.1 percent. Employment growth in the first quarter slowed to an average increase of 186,000 per month. Through 2018, we averaged 223,000 new jobs per month.
Keep in mind that 186,000 new jobs per month is a healthy figure given the very low unemployment rate across the country.
With earnings beginning to rise at one full percentage point faster than inflation, we are in the midst of the first broad wage gains in more than a decade. Viewed solely through the lens of total employment and wages, we are in a comfortable economic position. But, employment and wages are lagging economic indicators. Other data offer a less rosy future.
Through 2018, inflation accompanied an uptick in growth rates. This caused the Federal Reserve to raise interest rates modestly. They remain near their historical floor, but this along with the increasing damage of a trade war clearly slowed the economy. Right now, it appears the benefits from the Tax Cuts and Jobs Act have been fully erased, leaving us with debt without growth. While there is always hope that the 2018 tax cuts will play some long-term role in prosperity, that is hope without evidence.
Globally, growth is slowing and parts of Europe, Asia and South America have already entered recession. I believe Canada is now in recession, with its GDP growth stalling at year’s end. Canada is our largest trading partner, consuming mostly automobiles, food and industrial equipment. Two of these imports will decline significantly during an economic downturn.
Globally and here at home, manufacturing production is slowing significantly. The extended growth of factory jobs nationwide has stalled, and indices of manufacturing production show sharp declines in April and May. Evidence that we are closer to a recession comes from Indiana’s highly sensitive manufacturing sectors, which employ fewer workers than in January.
The yield curve measures the rate of interest (yield) charged on short versus long-term bonds. Normally, bond buyers would expect a higher rate of return on long-term than on short-term bonds. If that reverses, it signals the belief that short-term rates will drop as the Federal Reserve cuts rates and increases the money supply. The result is higher demand for existing short-term bonds, inverting the yield curve.
There are hundreds of yield curves, and the first one inverted last fall. Today, the majority of yield curves are inverted. This signals that investors are expecting lower short-term interest rates on bonds, which is a signal of a looming recession. This week, at least one prominent Federal Reserve official made clear that interest rate cuts are likely in the near future. A hint of recession is clearly in the wind.
Household consumption spending also shows signs of weakening. Indices from both the University of Michigan and the OECD international index of US consumer expectations are down for the year. More alarmingly, the retail stocks in major indices are all down for 2019. Both survey and revenue data are signaling a coming downturn.
Sales of automobiles have slowed in recent months, though there is enough monthly volatility to cast doubt on any broad conclusion from that sector. More worrisome is the rapid drop in RV sales in 2018. The sector is now laying off workers, suggesting they anticipate worse sales in 2019. RV sales are a bellwether indicator that now flashes bright red.
There can be little doubt that proximal cause of much of these recession worries is the trade war. Higher prices on key manufacturing components, the cost of shifting supply chains and the uncertainty about future tariffs weigh heavily on our economy. Consumers, too, face higher prices that dampen their confidence. It is startling to see increased tariffs (domestic taxes) at a time when the world’s economies are slowing. We have not tried that since 1930.