Economy Summary- Too many negatives

It may have been Fed tightening that was the last straw.  Or it may have been the cumulative weight of all these negatives including Fed tightening.

1.    Trade is still a risk.

2.    The Fed is tightening.

3.    US consumer net worth in 4Q is down at a -13% q/q a.r.

4.    Credit spreads are blowing out.

5.    US eco data have turned negative, eg, EVRISI company surveys, the LEI, Empire, Phil Fed, durable goods orders, Consumer Comfort, and NAHB.

6.    Anecdotal evidence has turned negative, eg, FedEx, Micron, and JLR.

7.    Oil has plunged.

8.    Brexit remains a risk.

9.    Foreign economies are slowing, eg, China and Europe.

​10. Yield curve is flattening.

​11. US govt shutdown was threatened and then happened.

​12. Riots have destabilized France.

​13. Mattis resigned.

A catalyst is needed, eg, a more dovish Fed, trade progress, China stimulus, etc: thinkREFLEXIVITY. 

Last week we trimmed our US real GDP forecast from +2.0% to +1.75%.  We still expect +2.0% real GDP in 2020.
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SUMMARY

Much Slower Growth in 2019

As consumer net worth has weakened and credit spreads have widened, the model we use to forecast US real GDP now projects just +1.75% growth.  The model forecast +3.5% for 2018.

Swings in consumer net worth lead swings in GDP by half a year.

Swings in GDP also move with swings in credit spreads, which have moved up sharply.

U.S. Economy Slowing

EVRISI company surveys have now declined significantly, and that’s after six months of a slow grind lower:

The recent decline by EVRISI company surveys overall has been led by a -11.4 plunge by retailers over the past three weeks.  Over the same three weeks, the S&P has plunged almost -400 points!

In addition to weaker company surveys last week, Consumer Comfort declined again last week.

Empire and Phil mfg indexes both declined in Dec.

Durable goods orders were soft.

And the LEI has slowed.  Real GDP growth is correlated with swings in the LEI.

Synchronized Global Slowdown

At the same time the US economy now appears to be slowing, foreign economies continue to slow, from Asia to Europe.  This news story last week certainly confirms that China is slowing:

And there were notable negative economic and financial headlines last week:

·  Top finance execs losing confidence in China’s economy.

·  China Inc to suffer more defaults.

·  India rural growth sputtering.

·  German business confidence worsens.

·  UK headed for bleak 2019 as Brexit worries mount.

·  Ross shares fall 40% as profit warning triggers retail selloff.

·  Swiss cut growth outlook.

·  After yellow vests, Macron faces even tougher battle.

New Zealand is a small economy, but its GDP data last week highlighted the Synchronized Global Slowdown theme.

Inflation Declining

It’s clear that commodity prices bleed into core.

Gasoline futures plunged -12 cents last week to $1.30.

Add 70 cents to that, and wait six weeks and that’s what retail gasoline will be, ie, $2.00 versus $2.35 now.  So it’s likely that the core PCE deflator will slow to just +1.6% y/y in Feb. 

And declining inflation is a global phenomenon.

The UK core CPI slowed to +1.8% y/y in Nov.

Korea’s core PPI slowed to +1.0% in Nov.

New Zealand’s GDP price deflator slowed to +1.2% y/y in 3Q.

Corrections Without Recessions

Since 1984, there have been 7 corrections in expansions, ie, without recessions (see next page).  All 7 ended with central bank easing. 

For example, the -19% correction by the S&P in 2011 ended when Operation Twist was announced.

This pattern since 1984 may help explain why the stock market reacted so negatively last week to the hike in fed funds and QT on “automatic pilot”.
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REFLEXIVITY

This was the lead story in the weekend CHINADAILY:

“China’s Central Economic Work Conference agreed to a step up in tax cuts and more accommodative monetary policies.  Fiscal policy will be very significant.  Monetary policy will play a large role.”

This is exactly what Don Straszheim has been saying.

In addition to China, there seems to be a global move toward stimulus:

·        US banks received a reprieve from an accounting rule that requires them to book losses on soured loans more quickly.

·        Trump commits to $750b defense budget.

·        Japan beefs up defense.

·        Macron pledges tax cuts and minimum wage boost.

·        Sweden heads toward a more expansionary budget.

·        Indonesia to give poor $2.6b in aid.

·        Saudi Arabia to lift domestic spending.

The Fed seemed out of step last week with this global REFLEXIVITY theme.

Puzzled

     Looking over all aspects of the above SUMMARY, it’s puzzling why the Fed didn’t take a more dovish tack last week.  They probably made a mistake.  If they did, it can be addressed, but damage has been done.

     In any event, negatives seem to still be increasing, not receding:

“Navarro says that a trade agreement in 90 days will be difficult and Beijing needs to be prepared for a full overhaul of its trade practices.”

     In addition, “Mulvaney says the shutdown might last into the New Year.”

S&P Earnings Should Still Be OK

Even with just +1.75% real GDP growth, S&P earnings are likely to increase +5%.  That’s the suggestion from 2011, 2012, 2016.