Is a Major Economic Surprise on the Horizon?
Author: Greg Valliere
April 12, 2019
WHILE WAITING FOR HERMAN CAIN TO WITHDRAW from consideration as a Fed Governor — we’re betting on this afternoon — let’s take a look at the biggest potential 2019 surprise: the economy surges as warm weather arrives and GDP growth exceeds 2-1/2%.
THE ATLANTA FED HAS REVISED UPWARD its closely watched “GDP now” indicator to 2.3% growth for the first quarter — and the first quarter often is the weakest quarter of the year. With interest rates astonishingly low, housing and autos should rebound; with wages inching higher, real disposable income looks good; with taxes dramatically lower, business fixed investment should contribute to growth; with the China trade war likely to end by late spring, the farm belt slump and business uncertainty should begin to recede.
THE BIGGEST FACTOR is the remarkable amount of Washington stimulus in the pipeline. The Fed is arguably too dovish right now, as Mohamed El-Erian said yesterday, but the central bankers are determined to take a risk that the economy might over-heat; the Fed wants higher inflation. And fiscal policy is likely to stay stimulative, with more spending likely in the 2020 budget year, which starts on October 1.
EVERYONE SEEMINGLY HATES THIS STOCK RALLY, which snuck up on most Wall Street analysts after the bungee jump plunge just before Christmas. Many analysts were predicting a new bear market, yet here we are in mid-April with the stock market about to set record highs. And everyone seemingly dismisses the economic recovery, which this summer will become the longest expansion in U.S. history.
THE BUSINESS CYCLE HASN’T BEEN OUTLAWED: A recession surely is coming, perhaps in a couple of years, but something looks a little different: at the mere whiff of recession, the Fed will begin hinting that even more accommodative policies are possible. The Fed hasn’t been intimidated by Donald Trump; it has been intimidated by the stock market.
THIS IS VERY GOOD NEWS INDEED for Trump, now the favorite to win a second term. He has been more erratic than usual lately, alarming Republicans in Congress, but the public isn’t paying close attention.
THE GENERAL PUBLIC sees solid economic growth, and if GDP expands by about 2-1/2% this year, that will be more than enough to create new jobs. So we won’t spend any time worrying about an inverted yield curve; there’s surprisingly little to worry about — except, perhaps, an economy that could begin to over-heat by summer.
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