Back to top

The Rodney Dangerfield Economy Persists

Read MoreHide Full Article

This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.

 

  • Stock Market and Economic Data disagree – who is right?
  • Despite solid fundamental Economic Strength, stock markets seem concerned
  • Much Ado About Nothing?

While the U.S. economy continued on its solid growth path the past few quarters, stock markets appeared to be relatively unimpressed.

Since the beginning of the year, it seems the slightest signs of macro concern can cause corrections and induce increased volatility. In February of this year, we witnessed slightly larger wage increases than expected. This set off a chain reaction of increased rate hike expectations, causing a pullback in the stock markets.

Similarly, last month another period of increased volatility in stock markets hit, as investors became concerned about the overall outlook, due to trade wars. It thus appears that despite solid fundamentals in the U.S. economy, quarter-after-quarter, investors expect the domestic economy to lose steam eventually. Are these concerns warranted, or is this much ado about nothing?

Ignoring Harry Truman’s request for a one-handed Economist, the answer to that question depends on a number of factors.

On the one hand, so far we have seen very strong U.S. macro fundamentals. That leads us to believe that the economy is in great health and should continue to perform well. On the other hand, we agree with stock market investors. A couple of areas are cause for concern. While low unemployment levels and high consumer sentiment fuel current levels of high GDP growth, business spending has not stepped up to the plate yet.

Business spending growth remains dismal compared to the very strong 1st half of the year. Unless we see a strong turnaround in the 4th quarter of 2018 or first half of 2019, it will become more and more difficult to maintain the economy’s momentum.

In fact, our NEURAL NETWORKS forecasting model indicates a slowdown of the economy in 2019 to +2.3% based on current conditions. In order to maintain levels closer to +3.0%, we would need to see a strong pick-up in business investment. This would translate into higher productivity eventually and support the economic engine.

This is our impression. Business spending will be largely determined by the success (or lack thereof) of trade talks between the U.S. and China, the big wild card of 2019. Unless companies see some form of progress that leads them to see a path towards a predictable tariff environment, companies will be very reluctant to invest. They will prefer instead to return shareholder value thru more buybacks. However, Zacks Economists believe that while trade tensions have a strong effect on GDP growth, it will not be the catalyst for a recession.

The other area of copious recession worry – that has a kind of potential in our view – is the Fed’s path of interest rate hikes in 2019.

While a December rate hike appears likely, beyond that it remains unclear how far the Fed will push up the Fed Funds rate. According to its dual statutory mandate of low unemployment and stable inflation expectations, a gradual continuation of rate hikes appears justified. This is mostly due to core consumer inflation levels getting close to their target, in order to prevent the economy from overheating.

Might the Fed choke the U.S. macro engine – in its attempt to throttle down inflation – too soon? In a recent interview, Fed Vice Chairman Richard Clarida emphasized the main goal as to sustain maximum employment and low inflation for as long as possible.

How exactly the Fed attempts to achieve this goal will depend on their estimate of the ‘neutral’ interest rate will be. That is, a stable interest rate that neither accommodates nor restricts ongoing economic conditions. If their estimate ends up being correct, they would be able to pull off a timely slowdown of rate hikes, and prevent the economy from contracting.

While Zacks Economists do not have an answer to what that ‘neutral’ rate might be, we do see an answer emerging to the growth question; on whether stock market investors fears were warranted in the ability of the Fed to slow down rate hikes as it comes closer to that ‘neutral’ rate.




In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


SPDR-SP 500 TR (SPY) - free report >>

NASDAQ-100 SHRS (QQQ) - free report >>

SPDR-DJ IND AVG (DIA) - free report >>

More from Zacks Economic Outlook

You May Like