Recession Versus Expansion Tug of War Continues Among Economists
It has to be more than mildly confusing for the public to hear so many talking heads opine about the same issues facing the economy and financial markets. After all, there is more or less access to the same data but there are often night-and-day differences of opinion about what it means in the end. Late in the summer there were endless media calls for an imminent recession. Some financial firms had talked about elevated risks, while others had gone on the record calling recession fears as overblown.
24/7 Wall St. prefers to offer both sides of the coin to allow readers to form their own intelligent opinions. At the same time that Goldman Sachs has panned the idea of a recession in 2020, Societe Generale has its own forecast signaling that the United States will enter a mild recession in spring of 2020. Many preliminary reviews and forecasts are being issued for the 2020 economic and financial market outlook. Some reports have been reissued in recent days, and some are likely to be revised in the coming days and weeks as more data become available.
While a mild recession is predicted to come along with two quarters of declining growth, the note points out that there is a serious question of whether prospects for the 2020 election reduce the odds of a slowdown as policy efforts can offer stimulus.
Stephen Gallagher, Chief US Economist and Head of Research in the Americas for Societe Generale, sees a limited scope for fiscal and monetary policy to respond and preclude a downturn. The Federal Reserve has already lowered interest rates a year after the 2018 tax-cuts added to the budget deficit and further entrenched partisan policy responses. Gallagher’s view does show how and when the timing of a recession can play a role:
A divided Washington is unlikely to support fiscal measures until the slowdown is under way. Another thought is the recognition of recession. We see a springtime recession. Historically, it has been 8-12 months after the start date of the recession before a recession was officially declared. For what it matters to voters, an official declaration of recession is unlikely until after the November 2020 elections.
Multiple drivers are used for supporting this call for a mild U.S. recession in 2020. Consumers have increasingly responsible for U.S. growth at the same time that business investment has been falling earlier and faster than previously expected. Factors contributing to the uncertainty were noted around trade, airplane safety and even a major labor strike in the auto industry — which means that business investment could see momentary gains in early 2020. Gallagher commented:
The more fundamental picture of weak profits and a poor outlook on activity constrains business investment in both equipment and structures. We expect these weak underlying fundamentals to persist. Net trade is also frail, and with most economies looking for growth leadership, US exports are unlikely to contribute much to the growth outlook. That leaves the consumer sector. Normally powerful, consumers are now facing slowing job growth. When and if consumer spending slows, recessionary forces would be unleashed.
Societe Generale’s view is that low inflation gains, despite tight labor markets, should persist even with tariffs having a role. The report said:
There are two near-term concerns to keep in mind. First, tariffs technically lift inflation measures in the months tariffs are imposed and are captured in the inflation growth rates temporarily. These tariff-induced increases have been modest and have not altered our stance or the market’s long-term view on inflation. Second, inflation tends to follow the business cycle with a lag. Granted there has been limited upside on inflation in recent years, but we still anticipate a softening in price trends in the event of a recession.
All in all, the key issue around labor trends is that job gains are slowing and the firm expects to see jobless claims rising in early 2020. Those claims have been considered a leading indicator of the business cycle in the past, but using a rise in jobless claims has traditionally offered only a few months of lead time.
While this report is more cautious and more negative than has been seen in many other reports, it’s important for readers to get access to multiple sides of major economic issues such as a recession. After all, most people’s lives are negatively impacted during periods of contraction.