With the yield curve collapsing (let’s look at the big picture, not the last couple of days) and the Fed seemingly determined to pursue its shadow “third mandate” (curbing overly loose financial conditions) at the risk of tightening into an environment characterized by lackluster inflation, more than a few commentators have asked if a recession is just around the corner in the US.
Adding to the angst is the failure of the Trump administration to advance its growth-friendly agenda. It’s becoming more clear virtually by the day that between the Russia probe and a series of self-inflicted PR wounds, the White House will be hamstrung indefinitely with regard to healthcare, tax reform, and fiscal stimulus.
Indeed, with every divisive tweet, Trump effectively gives opposition lawmakers one more reason to push back against his agenda.
Meanwhile, an overheating labor market seems to suggest corporate margins may have peaked and the banks notwithstanding, the buyback bid for equities may soon give way to concerns about balance sheet health.
Throw in the fact that this expansion is already the third longest on record and one can make a reasonably compelling argument that the risk of recession has risen materially.
And while SocGen says that risk is still “extremely low,” the bank’s “concerns are growing.”
Below, find those concerns and do note that SocGen relies heavily on the assumption that tax cuts will eventually materialize to support the contention that a downturn isn’t imminent…
Via SocGen
US recession odds remain extremely low, but concerns are growing
Current US economic expansion is the third longest. The current US business expansion that began in mid-2009 is 96 months old, making it the third longest expansion in US economic history.
With tax cuts, we are likely to see this expansion last through mid-2019 and become the longest ever in US history. Beneath this optimism, however, we are struggling with narrowing profit margins and a flattening yield curve. These factors typically occur at the later stages of a business cycle. Tax cuts are important to maintain our base-case expansion outlook through 2019.
Concerns are narrowing profit margins and Fed hikes. These two factors are major components of our Recession Probability Model. They portend low odds of a recession within the next year, but they are both moving in a disturbing direction.
Narrowing profit margins are already curbing hiring growth.
Additionally, the yield curve is flattening, and if the Fed fulfils its dot-plot guidance, the curve could flatten considerably more through 2018.
These fundamental business cycle variables are deteriorating, making the extension of the business cycle more dependent on tax cuts.
Auto and consumer credit lending offer hints of late-cycle stresses. Slowing sales of autos — a big-ticket discretionary item — along with rising auto loan repayment delinquencies are the first real sign of a slowing business cycle.
Sound analysis, with the exception of:
“It’s becoming more clear virtually by the day that between the Russia probe and a series of self-inflicted PR wounds, the White House will be hamstrung indefinitely with regard to healthcare, tax reform, and fiscal stimulus.
Indeed, with every divisive tweet, Trump effectively gives opposition lawmakers one more reason to push back against his agenda.”
While the administration is hamstrung, you mislabel the reasons it is so – likely, and understandably due to a skewed perspective borne from partisan and personal distaste for Trump.
The opposition will stand against Trump (and Republicans) NO MATTER WHAT. The Russia BS could disappear, as it should, and the tweeting could shift from Andrew Dice Clay to Mother Theresa, and the opposition would remain just that – opposed in unison. But, hey, that’s politics.
Trump’s problem with healthcare and tax reform is not the opposition – they are a constant. The variable is conservative members of congress that hold a lot of leverage considering the thin Republican majority, especially in the US Senate. This is blatantly clear in the current healthcare bill impasse as a handful of conservatives have decided it is not satisfactory. Good for them.
To be clear, tax reform will have a different flavor due to the fact that most Republicans will vote for tax cuts no matter the degree and CBO score, border-tax adjustments notwithstanding.
But Trump’s agenda will remain short of being legislatively viable for as long as he is unable to shepherd legislation that is conservative enough to gain the support of key players in the Freedom Caucus variety to keep campaign promises and satisfy personal ideologies and moderate enough for the milquetoast Republicans to keep their lobbyist friends and campaign consultants happy.
Trump is not exactly a ‘needle-threader’ and is intellectually incapable of passionately and effectively lobbying all Republicans to support “scary” conservative solutions as Reagan could because…he is not a conservative or an effective orator, so your larger point remains accurate in my view.
But it has nothing to do with Russia, or tweeting, or anything Democrats will slam trump for, contrived or warranted. They don’t matter. Only the currents within the Republican majority matter.
Good article H
It’s an excellent de facto admission that the Trump effect is in fact alive and well.
The Russia bullcrap will blow over there’s no question about that. The legs on the Russia story are so short the media is now reaching for additional props it’s completely ridiculous
that article literally says the exact opposite of what you just said. there is no “de fact” anything in there. rather, there is an explicit prediction that this administration is going to fail miserably.
“The legs on the Russia story are so short the media is now reaching for additional props it’s completely ridiculous”
A prop, like a shower?
Would it be OK if I cross-posted this article to WriterBeat.com? I’ll be sure to give you complete credit as the author. There is no fee, I’m simply trying to add more content diversity for our community and I liked what you wrote. If “OK” please let me kfnow via email.
Autumn
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