Year of the Pig outlook: Is US growth running out of time?

At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money.

We are opening our questions about the Year of the Pig by weighing the health of the US economy (and, by extension, the world’s).

Will the US economy suffer a major downturn?

Answer: No (at least, not in 2019)

Economists have been offering ominous medium-term predictions about the US economy for at least two years now. They note that economic cycles typically last around eight or nine years, with a period of growth being followed by some form of major slowdown or outright recession.

The US economy is now entering its 11th year of GDP expansion. It is now standard to refer to it as being in a ‘late stage’. In other words, the end (of this period of growth) is near.

But ‘near’ in economic terms can still cover a fairly substantial period of time. The view of most (but by no means all) economists is that while the US economy will slow from its unusually robust growth rate of around 3% in 2018 — its fastest growth rate in 13 years — it won’t fall into a recession.

When considering the state of the world’s largest economy today, it’s worth remembering a few factors. First, it has an unpredictable president who is unusually focused on bolstering short-term indicators, such as stock market performance.

Second, it enjoyed an adrenaline shot last year following the largest US corporate tax cuts in US history. This helped to bolster short-term economic growth, at the cost of inflating the country’s deficit. While the positive effects of these tax cuts are waning, they will still offer some positive impact during 2019.

There are other positives too. US unemployment is at around 4%, its lowest rate in 20 years, and US companies all enjoyed strong profit growth in the third quarter, of around 3.5% on average.

But for all the sunny news of last year, some clouds are gathering. For a start, company profitability may be peaking, with many companies barely expected to report year-on-year profit growth in the first quarter of this year.

That partly explains why the Federal Reserve offered a statement from its January meeting that observers interpreted as meaning it could hold off on raising rates for a period.

Perhaps the biggest indicator of an inbound major economic slowdown or recession is an inversion of the US Treasury bond yield curve. Economists mostly look for an inversion of the two-year and 10-year yields, because this indicates both a lack of investor confidence in the short-term plus a rising tendency to put money into safer, longer-term assets. Historically, this has been a reliable harbinger of economic trouble ahead.

As we noted in our Year of the Dog reflection on this topic, the three and five-year Treasury yields did invert briefly during December. The two- and 10-year yields did not, but came close (the two-year was quoted at 2.8%, while the 10-year was at 2.91% on December 4). Some economists believe a proper inversion could come in the second half of 2019, especially if the Fed resumes rate hiking once more. That would likely presage a slowdown or mild recession in 2020.

Of course US President Donald Trump will not want to see a major economic slowdown in his re-election year, and will no doubt try to bully the Fed into easing rates. He may also seek some form of investment stimulus, possibly by passing a major infrastructure bill (one of the few areas on which he may be able to forge an agreement with the Democratic party that now controls the House of Representatives).

Plus, Trump could declare some form of victory in his trade war and ease off tariffs, to try and improve corporate confidence. This could have a positive effect too.

But the truth is Trump can only influence, not dictate the fate of the US economy. The country’s economic output has been growing, uninterrupted, for a long time and corporate profits can’t rise forever. The US will almost definitely grow at a slower rate this year, most likely at around 2%. 

And 2020 could be the year when the recession the US has avoided for over a decade finally emerges.