by Steven Bell, Managing Director, Portfolio Manager & Chief Economist,
Intangibles may have extended the economic upswing but they haven’t abolished recessions. Indeed, there is an overwhelming consensus, supported by a number of external speakers at our Forum, that the US will slip into recession in 2020.
We disagree. Certainly, a slowdown in US growth is inevitable given the hectic pace at which the economy
In the past, the US yield curve – the gap between long and short
Consensus suggests a US recession is likely in 2020. Is this likely?
The Phillips curve shows the relationship between wage inflation and unemployment. There is much debate about the strength of this relationship or, indeed, whether it has broken down completely. It is usually plotted as a scattergram but a clear picture emerges if the dots are joined up, as in AW Phillips’ original 1958 article. In chart 6, the dark blue segment relates to economic downturns and recessions when unemployment is rising. The upswing part of the cycle, when unemployment is falling, is plotted in light blue. The dark segment is clearly steeper than the lighter segment. This suggests that inflationary pressures emerge relatively slowly in economic upswings but diminish rapidly in downturns.
Offsetting these concerns, however, is a benign inflationary picture, which is, in part, a consequence of the way in which intangibles have alleviated capacity constraints. This suggests that, rather than suffering an outright contraction, the US will only experience a modest slowdown in its next downturn.
The charts indicate that if the downturn is sufficient to
Forecasters can probably discount one of
the main catalysts of the last downturn – the US housing market – from
being a cause of the next. Household debt has fallen, serious mortgage
delinquencies are on the wane, as is the proportion of subprime loans in
overall housing debt. Yet, housing has been a source of weakness this
year. This is partly in response to rising mortgage rates but is also a
result of the Trump tax reform, which restricted mortgage tax relief,
and capped at $10,000 the amount of state and local tax (SALT), much of
which is property-related, that can be deducted from federal income tax.
This is a useful, if accidental, offset to reflationary pressures
the Trump tax reform.
As it stands, there is no obvious trigger for the next recession.