US Economic Outlook – October 2018

There is absolutely no argument that the US economy is growing and booming as of 3rd quarter of 2018.  The explanation as to why this is so is divided along political ideologies.  This despite ongoing political turmoil in Washington DC and the gloom and doom predictions surrounding the trade war with China and other trading partners, the US economy couldn’t be in better shape.  GDP growth throughout 2018 has been stronger than predicted.  Of course if you look at “consensus” economic predictions, you will find that economist predictions in the aggregate are wrong 100% of the time.  There may be a handful economists that might get it right but that reminds me of the idea that if you put a hundred typewriters (remember those?) in a room with a thousand monkeys, eventually they will reproduce the complete works of William Shakespeare.  Of course some economists are now predicting a recession because things are going too well and we are due for one (I would refer you back to the previous sentence on the accuracy of economists).

The Proof is in the Pudding

The metrics by which we say the US economy couldn’t be any better are as follows:

• US GDP is currently around 4.1% growing far faster than (in fact, nearly double the) consensus estimates while the rest of the world is flat or declining
• US unemployment has not been this low in decades, reaching a theoretical “full employment” situation with fears of labor shortage rising
• Capital investments by US corporations are rising after 8 years of decline under President Obama where they had been the lowest in history
• Corporate profits are significantly higher across all industries due to tax cuts and an improved US economy
• The US stock markets, an indicator of future expectations has been rising steadily

The Fears

Of course there are those who say things are going too well and we are due for a recession.  Some of the negatives the pessimists are pointing to include the following:

• The US Fed is raising interest rates, every previous recession in the past 50 years has been blamed on the the Fed raising interest rates and causing economic slowdowns.
• The trade war between US and China may cause price inflation and economic slowdown.
• The lack of workers in the US will also drive up price inflation and limit productivity for companies as they struggle to find qualified workers.
• While the US continues to grow, the world economy is seeming to falter.  As our economy is closely tied to the world economy, this could negatively impact us.
• A “disorderly Brexit” could disrupt European economies and bring contagion to the US.

While all of the above sources of risk is a valid concern at the extremes, it seems highly unlikely that a recession is around the corner in the short-term.  If markets and countries are logical, then problems will work themselves out.  However, while we all know that this is generally true, there are always exceptions and the unexpected can always happen.  If the equity and bond markets are an indication of future expectations, things are pretty positive.

The Fed raising interest rates has been linked to the start of recessionary downturns in the past.  However, let’s keep in mind that at current levels, US interest rates will still be at historical lows even if the Fed raises another 100 basis points (bps), the rate will still be at the low end of rate environments in the past.

Fears of the trade war have been overblown.  The US using tariffs as a bargaining chip has successfully re-negotiated more favorable trade terms with our major trading partners to include Korea, Mexico, and Canada.  The UK is eager to sign a trade deal with the US following the Brexit negotiations.  China is on the ropes and coming to the realizing that they will be cutting off their noses to spite their face if they keep engaging in a trade war with the US.  The lack of workers in the US economy will soon be supplemented by increasing productivity and the use of AI and robotics in the face of a labor shortage.  While the world struggles with bad government policies and national debt, the US will likely keep growing despite that environment.  This also makes the US the place to invest for foreign investors looking for a safe haven.

All in all, things are looking good as of October 2018.