2019 Recession? Expectation of Moderation in Growth, Not Contraction
Nov. 6, 2018 Commentary

2019 Recession? Expectation of Moderation in Growth, Not Contraction

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With the renewed downside volatility in U.S. stock prices, we have received numerous questions from clients as to our economic outlook for 2019. Is the stock market foretelling of an upcoming economic recession? We suggest that no, the U.S. economy is not heading toward a recession next year. We believe economic growth is down shifting to a lower gear in 2019 rather than an outright economic contraction.

Our view has been, and continues to be, the U.S. economy will stay out of recession in 2019. We have been suggesting that the U.S. economy has been in its boom phase of the current business cycle, a cycle which started in 2009. We suggest the boom phase of 2018 will contract towards lower growth in 2019, but only back to average levels that we’ve experienced through this recovery and that have been supportive of growth in risk assets. In our view, the U.S. economy will escape an outright recession next year. That being said, with growth contracting, the economy will have a lower tolerance to absorb policy mistakes. The risk of falling into recession next year will grow, as economic growth rates wane.

Our 2019 Economic Story – Positive Yet Slowing Growth 

The current growth cycle has been long in duration, but short in intensity. This is one of the reasons we have felt the expansion, while slowing, can continue. Generally, it’s the intensity or magnitude of expansion, not the duration of, that determines if there is runway left for growth. We have been forecasting overall gross domestic product (GDP) growth of 3 percent to occur in 2018, and are looking for growth to decelerate in 2019. As we have been forecasting, we suggest the U.S. economy should experience 2 percent growth in 2019.

GDP Growth and Nominal GDP Growth

As can be seen from the above, nominal GDP growth rates have accelerated from less than 4 percent over the five years ending in 2017 to 5.5 percent this year. Historically, nominal GDP growth rates have been a good proxy for growth in economic final demand. Final demand is a reasonable proxy for business revenue growth rates. The difference between 4 percent and 5.5 percent revenue growth rates is sizeable and represents a true surge in overall economic activity.

Some of the catalysts which led to the upward surge in nominal GDP growth should wane as 2019 unfolds, and is the basis for our belief that growth in the U.S. economy will moderate.

  • A number of the positive catalysts from the tax cut enacted earlier this year will not act as a major catalyst to economic growth as the economy “calendarizes” against harder comparisons. In 2019 the tax rate will be the same for business that it was in 2018. That stimulus portion of the tax law change is done.
  • The jobs market is very robust, with little room for improvement based on historical standards. Recently, it was reported that there are more than 900,000 more job openings in the United States than unemployed; an all-time record. The catalyst to growth of a robust new-jobs market is primarily yesterday’s story.
  • Consensus expects to see the Democrats retake the majority in the House of Representatives. Even if the Republicans hold the majority in the Senate, the stage will be set for gridlock to intensify, if possible, over the next two years.
  • Tariffs bite, plain and simple. It is our opinion that artificial trade barriers slow growth by creating distortions in the free market process. Note, we aren’t saying trade is currently free, or fair. But when the world’s largest economic power decides to impose artificial costs to imports, various, undesired outcomes can occur.
  • Rising interest rates and other monetary policies are starting to be a challenge, and should continue to do so in 2019.
  • An economic growth contraction is occurring globally. It is hard to find an area of the world outside of the United States where GDP growth is accelerating. Europe, Japan and China are all experiencing some form of economic growth contraction.
  • We suspect that corporate profit margins are at risk of contracting to one degree or the other in 2019 as business costs rise (labor and certain raw materials) and the growth in top line revenue slows.

All of these factors are pointing to the view that overall economic growth should decelerate as 2019 unfolds. That being said, we do not believe we are heading towards an outright recession.

Basis for not heading into a recession

We have long used two main indicators which have, in the past, provided a strong forewarning of an upcoming recession. Both the six-month rate of change of the Leading Economic Indictor Index and the interest rate spread between the two and the 10-year U.S. Treasury notes are suggesting a recession is some time off and not imminent. In addition to these two tried-and-true historical indicators, we point to the following viewpoints:

  • Consumer spending should continue to rise nicely, albeit at a slower rate in interest-sensitive areas of the economy (housing and autos as examples). As the labor market continues to mature, we expect to see wage growth occur, rising to the 3.5 - 4 percent rate next year, the strongest we have seen in a number of years.
  • Capital spending may see a nice surge (we are suggesting a rise of 7 - 10 percent may occur) due to the continuation of the accelerated depreciation rates embedded in the tax-law change, still-low interest rates and a very positive business sentiment environment.
  • Government spending may see an upward push (no surprise here). If the Democrats take control of Capitol Hill, expect to see new enacted legislation favoring further increases in government spending.

So, what could the stock market be telling us as stock prices continue to be under pressure? I suggest the stock market is foretelling of our view that the U.S. – and global – economic growth will be shifting gears to a lower growth rate in 2019 than has been the case in 2018. Additionally, equity investors are probably sensing a more volatile period ahead as global central bankers continue their march toward a less accommodative monetary posture then has been the case over the last 10 years. 

 

This commentary is limited to the dissemination of general information pertaining to Mariner Wealth Advisor’s investment advisory services and general economic market conditions. The information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. There is no guarantee that any claims made will come to pass. The opinions and forecasts are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. 

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