The reason I keep tracking what is going on in the economy is that I wonder if there will be a recession near the 2020 election?* President Trump followers seem to be so smitten with him that I doubt it would affect his vote much, but it probably would a little and that might be enough.
Company executives are getting more nervous about the state of the U.S. economy, with nearly half now expecting a recession within a year.*
Some 48.1% now see negative growth by the second quarter of 2020, according to the latest Duke University/CFO Global Business Outlook survey. The results show that 69% figure a recession will start before the end of next year, which is roughly consistent with the previous survey in April that showed 67% were anticipating a downturn by the third quarter of 2020.*
There is all this hoopla over the Fed cutting rates as early as this month. With rates already at record lows As President Donald Trump’s trade wars rattle investors, Wall Street has reached for a security blanket: new Federal Reserve rate cuts to offset the economic damage.**
That measure of financial comfort could come as early as this week as the Fed meets for two days and issues a statement Wednesday. If not this week, nervous investors and the Trump White House hope for a rate cut in July, or perhaps September.**
Just how unusual it is for the Fed rates to be this low is shown in the figure.***
“The bar for precautionary cuts is lower if you are worried about the zero lower bound,’’ said Michael Gapen, chief U.S. economist at Barclays Plc, which predicts 0.75 percentage points of easing this year, one of the most aggressive calls on Wall Street.***
That said, economists are still parsing how much weight the Fed will put on the economic data in hand versus risks and uncertainties, and there isn’t much consensus. Twelve firms expect at least one cut this year, the Bloomberg survey showed, while 12 expect two cuts. Sixteen firms expected no cut at all, and two projected a hike.***
Companies are forecasting lower earnings.**** With Tariffs of 10% to 25%, we should be seeing price inflation, something that is not yet seen. Assuming that the Government is actually collecting the tariffs, this must mean that companies are absorbing the tariffs so it follows that there will be a hit on corporate earnings.
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Ahead of a season that starts in earnest the week of July 15, 77% of the 113 companies that have issued earnings per share guidance have warned that their numbers will be worse than what Wall Street analysts are estimating, according to FactSet.****
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A closely followed gauge of manufacturing in the New York area fell this month to its lowest level in nearly three years.****
(Second reference)
The Empire State Manufacturing Index tumbled to a -8.6 reading from 17.8 in May, a 26.4-point drop that was the biggest slide for a data series that goes back to 2001 and well below Wall Street expectations of 11.5. In all, 22% of respondents reported that conditions had improved since May while 30% said conditions worsened, according to the index, compiled by the New York Federal Reserve and indicating the difference between plans to expand and contract.****
Notes added July 3rd: The ten year Treasury dropped below two percent that is the lowest it has been since 2016. Note in the table at the end of the article that the 3 mo. Treasury is greater than the 10 yr Treasury. This often signals a recession. (https://www.cnbc.com/2019/07/03/us-bonds-treasury-yields-tick-lower-as-investors-monitor-data.html)
Note added July 10th: The famous guru of CNBC on stocks "...pointed to New York Fed’s recession indicator, which is based off of the spread between the 10-year and 3-month U.S. Treasury yields."
“For the first time in a long, long time, [it] has popped above 30% likelihood of a recession in 2020,” Cashin said. “Whenever it gets up to 30% it’s had a pretty good history of calling it.”
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“I’m not talking about necessarily an immediate recession. What I’m saying is with the warning signs moving, Powell has got to move along and that’s exactly what he is doing,” Cashin said.
(https://www.cnbc.com/2019/07/10/art-cashin-wearing-sp-500-3000-hat-warns-of-rising-recession-risk.html)
Then another economic forecaster says that the Fed would be wrong to lower the interest rates of Treasuries to stimulate inflation. I agree because the current Fed Funds rate of 2.25-2.50% is very low (see figure above). It is already inflationary and hasn't worked. David Kelly, the chief global strategist at J.P. Morgan Asset Management, told CNBC’s “Power Lunch” that he doesn’t think rate cuts by the Federal Reserve will boost the U.S. economy.
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You could go all the way down to zero on the Federal Funds Rate and not get to 2% inflation,” Kelly said.
(https://www.cnbc.com/2019/07/10/jp-morgan-strategist-fed-is-making-a-mistake-by-cutting-rates.html)
Note added July 12th: Inflation may be coming after all? After all, the current rate for the Federal Funds Rate is 2.25-2.50% which by itself is inflationary by historical standards and great pressure is put on the Fed to lower the rate further (see above). I wonder what will happen? Can inflation get out of control when the Fed Zigs instead of Zags and lowers rates?
https://www.cnbc.com/2019/07/12/us-bonds-traders-await-fresh-data.html
* https://www.cnbc.com/2019/06/12/duke-cfo-survey-corporate-executives-fearing-a-recession-in-2020.html
** https://www.cnbc.com/2019/06/14/fed-rate-cut-may-not-be-security-blanket-wall-street-is-expecting.html
*** https://www.bloomberg.com/news/articles/2019-06-16/powell-s-concern-over-zero-rates-seen-lowering-bar-for-fed-cut
**** https://www.cnbc.com/2019/07/01/companies-are-warning-that-earnings-results-are-going-to-be-brutal.html
https://www.cnbc.com/2019/06/17/empire-state-manufacturing-index-just-saw-its-biggest-drop-in-18-years.html
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