It’s a really slow week for economic data. Really the only important report is new home sales, which will be released Thursday.
I’ve been working on a few things, but they are really information-dense and time-consuming to organize, and because they deal with how long leading indicators interact with one another, I’ll probably post them on Seeking Alpha.
So in the meantime, let me give you a few hopefully pithy Big Picture observations.
1. Virtually every economic model that relies upon the yield curve is forecasting recession to happen sometime in 2020.
2. The few economic models that don’t rely upon the yield curve suggest a recession *could* happen later this year.
3. If we use a “fundamentals” based model that doesn’t rely on financial conditions like interest rates (“real” corporate profits, housing, and cars), the important data is deteriorating, but not enough at this point to forecast recession vs. slowdown.
4. All of these models seem to have a shortcoming in that they rely too heavily on monetary and interest rate policy, and do not adequately account for fiscal policy, like stimulus. Thus all of them “forecast” a recession in 1966-67 that didn’t happen!
5. The reason no recession happened in 1966-67 was LBJ’s “guns and butter” fiscal policy of Vietnam War military spending + domestic Great Society spending, which increased the budget deficit by 500% (!) and helped keep industrial production from declining.
6. The stimulus passed by the Congress at the end of 2016 is much smaller, amounting to only a 50% increase in the deficit. It is also much smaller than either Reagan’s or W’s tax cut stimulus.
7. In any event, the stimulative effect is estimated to end by the end of this year.
8. Contrarily, Trump’s tariffs amount to large, regressive sales tax increases.
9. Which means that, if things don’t change, by next year fiscal policy will be a net drag on the economy.
10. The question remains whether the positive effect of lower mortgage rates can overcome that drag, and the drag of higher short term interest rates.
11. In the meantime, every metric I use indicates that job gains are set to decrease substantially starting more or less right now. The UCLA forecast puts this figure at about 160,000 a month for this year.
12. Needless to say, if a recession happens by the end of 2020, especially if Trump’s tariffs play an important role, fundamentals-based Presidential election models do not bode well for Trump or the GOP.