Recession

Recession Ahead? Oops, US Consumers Didn’t Get The Memo

FORECASTS & TRENDS E-LETTER

Q2 hedge fund letters, conference, scoops etc

by Gary D. Halbert

August 20, 2019

IN THIS ISSUE:

1. Mainstream Media Wants Recession to Get Rid of Trump

2. July Retail Sales – Consumers Tune Out Global Slowdown

3. Temporary Treasury Yield Curve Inversion Rattles Markets

4. Dirty Little Secret: Stocks Tend to Rise After Yield Inversions

5. US Budget Deficit to Top $1 Trillion in 2019, Not in 2021

Mainstream Media Wants a Recession to Get Rid of Trump

It is becoming increasingly clear that the Left and the mainstream media believe the only way to get President Trump out of office next year is a US recession. They are increasingly stoking fears of a recession next year, and that led to some wild markets last week. The Dow Jones plunged 800 points last Wednesday amid such fears, its worst day of the year.

Adding to those fears, the Treasury yield curve temporarily inverted fractionally – which many fear is a precursor of recession. The yield on the 2-year Treasury briefly rose a few basis points above the yield on the 10-year Treasury on Wednesday, for the first time since 2007. The yield curve, while still very flat, normalized on Thursday.

Meanwhile, the 30-year Treasury bond yield plunged to a new record low, briefly falling below 2%. The mainstream and financial media interpreted this to be another sign that the US economy is heading south. Some even predicted that deflation is on its way soon. Fan those flames!

The problem for the recession crowd is that US consumers are not buying it. US retail sales were much stronger than expected in July, more than doubling the pre-report consensus. Despite the global slowdown, consumer spending was bolstered by the continued strong US job market and rising wages.

July Retail Sales – Consumers Tune Out Global Slowdown

American shoppers gave the US economy a boost in July, countering manufacturing-sector weakness, yet investors continued to have jitters due to fears of an inverted yield curve and the media’s unending warnings about a recession just ahead.

Retail sales, a measure of purchases at stores, restaurants and online, climbed a seasonally adjusted 0.7% in July from a month earlier when it was up 0.3%, and more than double the pre-report consensus of just 0.3%, the Commerce Department reported Thursday.

Recession

The robust sales report – the strongest reading since March – is a positive signal for the US economy, amid warning signs of a global slowdown. Consumer spending accounts for apprx. 70% of US economic output. Spending gains will feed into the broader pace of economic growth for the quarter, which could offset weakness from manufacturing and business investment.

After the strong retail sales report, forecasting firm Macroeconomic Advisers raised its Gross Domestic Product growth prediction to a 2% annual rate in the 3Q from an earlier estimate of 1.7%. The Atlanta Fed said the retail sales report caused it to raise its estimate of 3Q growth. Its GDPNow real-time growth estimator now stands at 2.2%, up from 1.9% in the August 8 estimate.

Still, US industrial output fell last month as the manufacturing sector continued to struggle. Manufacturing output, the biggest component of industrial production, fell 0.4% in July from a month earlier, the Federal Reserve said Thursday. That helped pull down broader output across factories, mines and utilities last month.

Trade-related headwinds, weak global growth and a strong dollar, which crimps demand for US exports, have taken a toll on manufacturers this year, thus weighing on the longest US expansion in history. US-China trade tensions rattled financial markets last week, and another market signal – the yield curve – contributed to the volatility.

Temporary Treasury Yield Curve Inversion Rattles Markets

Last Wednesday, the yield on the 2-year Treasury Note briefly traded higher than the yield on the 10-year Treasury bond for the first time since 2007, which rattled investors and equities suffered. As noted above, the Dow Jones plunged 800 points last Wednesday as the yield curve inverted briefly, its worst day of the year.

US interest rates continued to plunge with the yield on 10-year Treasuries falling below 1.5% briefly and 30-year T-Bonds falling to a new record low just below 2% temporarily.

Recession

The brief, mild yield curve inversion last week worried investors because a more pronounced yield curve inversion has preceded each recession in the last 50 years. The media assured investors that the inversion would almost certainly worsen and a recession would surely follow.

The problem is, the inversion didn’t worsen, it was only a few basis points and it only lasted one day. But to hear the media tell it, the world was coming to an end!

Dirty Little Secret: Stocks Tend to Rise After Yield Inversions

Here are some figures that might surprise you. Wall Street’s most widely watched gauge of the yield curve’s slope, the spread between the 2-year Treasury note yield and the 10-year Treasury, inverted last Wednesday morning. Historically, yield inversions have been a warning signal that the US may face an economic recession in the next 18 months.

But that doesn’t have to mean doom and gloom for stock investors. History shows that a yield curve inversion, while not an upbeat sign about the coming state of the economy, doesn’t necessarily translate to a lasting selloff in equity markets. Let’s look at some facts.

On average, the S&P 500 has returned 2.5% after a yield-curve inversion in the three months after the episode; it has gained 4.9% in the following six months; 13.58% a year after; 14.7% in the following two years; and 16.41% three years out, according to Dow Jones Market Data. That’s far from the disaster the mainstream media would have us believe! Take a look at the following chart:

Recession

So, as you can see, yield curve inversions – while they are generally negative for the economy about 18 months out – are rarely negative for stock market returns over the next several months or years. And most of the inversions included in the chart data above were far more severe than the temporary one we saw for one day last week.

Tuck this chart away where you can find it the next time the mainstream media overhypes a yield curve inversion, which happens from time to time.  And remember, you read it here first.

US Budget Deficit to Top $1 Trillion in 2019, Not in 2021

Shifting gears from the topics above, the White House Office of Management & Budget (OMB) recently revised its estimate of the federal budget deficit to $1.085 trillion, which is double the $526 billion they predicted this time last year. And it predicts future budget deficits of more than $1 trillion annually for at least the next decade.

Previously, the OMB and the Congressional Budget Office forecasted that we wouldn’t hit $1 trillion deficits until 2021 or beyond. However, the US government budget deficit for fiscal year 2019 topped a whopping $867 billion at the end of July. That’s a 27% increase over this time last year, and the year is not over yet. The fiscal year runs from October 2018 to September 2019. So, the deficit will indeed top $1 trillion by September 30.

In July alone, the US government shelled out $120 billion more than it brought in, a deficit that’s 56% bigger than it was at the same time last year. Although receipts increased 12% to $251.3B in July, outlays rose 23% to $371 billion. Spending is out of control!

The bottom line: The US annual budget deficit will top $1 trillion in FY2019, at least two years earlier than previously forecasted. Further, the deficits are forecast to continue above $1 trillion annually for at least the next decade.

I have warned of this before. Now, trillion-dollar deficits are here even sooner than anyone predicted. You might recall that presidential candidate Donald Trump promised in 2016 that he would eliminate federal debt in eight years if elected for two terms.

I don’t know anyone who believed him at the time but the fact is, President Trump has almost doubled the federal budget deficit from $587 billion in FY2016 to $1.085 trillion in FY2019!

The saddest part is that, historically, we used strong economic times to pay down debt. Now, there is not even a hint of doing so. We Just spend more and more every single year, no matter which party is in control. This will not end well! But, admittedly, I’ve been warning about this for years.

There is a dangerous assumption around the world that developed nations, especially those who print their own currency, can increase debt levels indefinitely. History shows this is false. Another financial crisis awaits us. The only question is when.

Wishing I had better news,

Gary D. Halbert

SPECIAL ARTICLES

Trump-Haters Want a Recession, Really

Retail Sales Surge in July, Reassuring Sign For the Economy

Does Inverted Yield Curve Always Predict a Recession?

Congressional Budget Office Predicts “Unprecedented” Rise in US Debt

Gary’s Between the Lines Blog: Baby Boomer Bankruptcy Filings Skyrocket


Saved Articles
X
TextTExtLInkTextTExtLInk

Are you a smart investor? Join tens of thousands of sophisticated investor reading our authoritative free newsletter

* indicates required


Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up today and get three months free

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 10/31/2019 or after next 25 20 subscribers take advantage whichever comes first – please do not share this discount with others

 

0