by Greg Valliere, AGF Management Ltd.
LET’S TAKE A BREAK from the impeachment frenzy and celebrate this morning. The Washington Nationals, given up for dead six months ago, are world champions, what a wonderful feel-good story. There’s another reason to celebrate: the much-ballyhooed recession still isn’t imminent.
THE MANTRA DURING THE SPRING AND SUMMER was that a recession was unavoidable, perhaps soon, because of the inverted yield curve. Many economists proclaimed that a recession was imminent, and the media eagerly spread the word, warning that it could doom Donald Trump’s presidency.
BUT DATA RELEASED YESTERDAY showed that GDP growth in the third quarter didn’t really weaken much; it was 1.9%, compared to 2% in the second quarter — not great, but not far below the economy’s trend growth level of about 2-1/4%. With the fourth quarter expected to grow by around 2%. there’s suddenly no talk of recession — a major reason, we suspect, why the stock market is at record highs.
ECONOMIC GROWTH COULD BE SUBSTANTIALLY HIGHER if there was some clarity on trade policy, but modest “Phase one” deal with China probably won’t be finalized this year, and the NAFTA replacement deal may be stalled in the House. When the trade uncertainty subsides, growth could get into the mid-2% neighborhood.
EVEN JEROME POWELL’S MAIN TAKE-AWAY yesterday was ignored by the press. He and most Fed officials have concluded that the recession fear has passed for now, so they can pause in rate cuts. Monetary policy is still quite accommodative, and fiscal policy is extraordinarily stimulative, with spending on steroids and the deficit sure to exceed $1 trillion a year well into the next decade.
A RECESSION HASN’T BEEN OUTLAWED, and we might worry about one by 2021. But this scenario doesn’t warrant the hand-wringing of just three months ago that a recession would arrive by this winter. It won’t. Actually, we still think there’s a Goldilocks scenario: moderate economic growth, a strong labor market, astonishingly low interest rates, tame inflation, with the stock market at record highs.
YET WHEN WE MEET WITH HIGH NET WORTH RETAIL CLIENTS, we hear nothing but anxiety. These investors tell us they think a recession is coming, largely because of what they hear from the press. But the press — and many economists — got it wrong; there’s no imminent recession.
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This post was first published at the AGF Perspectives Blog.
