Outlook

Good news: last month’s government report that the economy had added only 20,000 jobs in February was an anomaly. In March, 196,000 new jobs were created, about in line with the long-term job-creation trend. The unemployment rate remains at a low 3.8% and hourly wages ticked up nicely, to 3.2% above last year’s level.

So all is for the best in the best of all possible worlds, then. Well, not quite. University of Chicago professor and former Obama chief economist Austin Goolsby says the economy is slowing and will continue to slow “and there are risks of recession.” The service sector, which contributes about 80% of the value of everything the economy produces (GDP), is growing at the slowest rate since August 2017. Corporate profits are under pressure not only from rising labor costs, but from the recent spurt in oil prices – up 32% in the first quarter due to the success of the OPEC-cartel-plus-Russia in reining in output, and to US embargoes on oil from Iran and Venezuela. The consequent 50-cent per gallon rise in gasoline prices is eating into the cash in workers’ wallets from higher pay, and might hit already-weakening retail sales. There is much talk of a coming “earnings recession”, especially from those who believe the boost to profits provided by the Trump tax cuts is losing its force. Higher prices and the partial satisfaction of pent-up demand resulting from the Great Recession are taking their toll on vehicle sales, which fell 2% last month, the start of the selling season, and are likely to fall below the annual sales rate of 17 million vehicles for the first time since 2014. Then there are the recently revealed impediments to a rapid recovery in China, and a slowdown, perhaps to zero growth or worse, in the EU as orders for German manufactured goods plummet.

At a time that Christine Lagarde, Managing Director of the International Monetary Fund (IMF) calls “A delicate moment for the global economy,” we have a President who, Goolsby moans, “every six days drops a huge bomb on the economy” and creates huge uncertainty.

One such is his announcement that he intends to make two appointments to the Federal Reserve Board of Governors, both in agreement with his call for a one-half percentage point cut in interest rates, “doves” in the jargon of the trade, “turkeys” to anti-Trumpers. Moore has called the Fed Chairman “incompetent” and called for his firing. Both face difficult confirmation hearings, Moore because of contempt citation for failure to pay some $300,000 in child care and alimony, Cain because of sexual harassment charges that he has denied. Both were hard money, gold standard advocates until they weren’t. Robert Robb, a columnist who follows these sorts of things admires Moore’s intellect and believes his work on taxation to “first-rate and sound”, but with seeming regret notes that the nominee’s support for lower interest rates at a time when the economy is growing is “a surprise since Moore has historically been a sound money guy,” which Trump, his new patron, definitely is not.

  • Meanwhile, lest some semblance of certainty descent on markets, the President is
    continuing to treat fed governors as piñatas at a time of huge federal deficits, when they must be, and be seen to be, independent;
  • hinting at a cabinet shake-up by expressing unhappiness with Steve Mnuchin, his Treasury Secretary and a moderate on trade, for recommending the appointment of Jay Powell as Chairman of the Federal Reserve Board;
  • threatening to close the border with Mexico, a gateway through which $1.5 billion in trade passes every day;
  • considering imposing tariffs on imported EU automobiles that he claims are a threat to national security. “The Audis are coming, the Audis are coming,” quipped columnist George Will last week.

Meanwhile, congress is subpoenaing the President’s tax returns; investigating why Trump over-rode security advisors and granted security clearances to his daughter, Ivanka, and her husband, Jared Kushner; and charging that Attorney General William Barr’s summary of the Mueller report tilted its conclusions in a pro-Trump direction. Impeachment remains a goal of some newbies.

Poor economic data and uncertainty have prompted half of business economists have rushed out downward revisions of their growth forecasts. But the forecasting record of economists leaves something to be desired. Consulting the entrails of a slaughtered animal is no longer fashionable. Building models is the modern version, but the IMF has found that of 153 recessions in 63 countries from 1992 to 2014, only five were predicted by a consensus of private-sector economists in April of the preceding year. “The stock market”, remarked the late Paul Samuelson, “has forecast nine of the last five recessions,” tarnishing its reputation as a lead indicator.

So what is a poor soul, tasked with the chore of predicting where the economy is headed, to do? Best to balance what the pessimists are saying with a bit of good news. The economy and its service sector continue to grow, although not as rapidly as recent years. Manufacturing activity picked up in March, with new orders leading the way. The job market remains a happy place, a fall in mortgage rates has resulted in a strong opening to the spring home-buying season, and consumers’ balance sheets are in good shape. With both China’s president Xi Jinping and Trump under pressure to cut a deal, it is highly unlikely that tariffs on Chinese goods will be raised.

And to give people who are risking real money, their own, their clients, and their shareholders, a hearing. Byron Wien, vice chairman of Blackstone Advisory Partners, believes interest rates will remain low, because of a tremendous amount of liquidity “looking for a place to hide.” He expects the global economy to notch close to 3% growth this year, the US economy to grow by a satisfactory 2%-3%, and Europe’s to manage growth of 1%-to-2%. And does not believe a recession will hit until 2021 at the earliest. JPMorgan Chase CEO Jamie Dimon does not believe the effects of the tax cuts are coming to an end. He told shareholders last week that tax reductions have made American firms competitive, encouraged the repatriation of profits, and increased reinvestment of capital, creating jobs and strong businesses “over many years.”

The President, who wants the economy to “take off like a rocket”, has a time horizon shorter than Dimon’s “many years”. His runs only until the November 2020 election.