Growth or Recession – Which is it?

By Advisor Thomas Barnes

Economic opinions are as numerous as the grains of sand on the beach these days.  Some see recession on our doorstep while others see market growth.  Many folks seem to analyze data and come to conclusions that support their opinion of the US economy while ignoring other data points that do not support their opinion.  We believe the facts should dictate the opinion and not the other way around. 

Here are the facts as we see them:

  1. Total US trade in goods and services (exports plus imports, combined) was $4.9 trillion in 2016. In the past twelve months, it’s been $5.7 trillion, an increase of 16.3%. In other words, trade has grown faster than the overall economy…it has not diminished due to tariffs.  
  2. Trade tensions with China are real.  These tensions are more relevant to some companies than to others.  That being said, everyone looks forward to the US reaching an agreement with China. But the Middle Kingdom is not the be-all end-all when it comes to world trade. Supply chains are moving – trade is dynamic – which is why the costs to the US economy have been far less than static analysis predicted.
  3. So far this year, US imports from China are down 12.3% from the same period in 2018, but imports from Vietnam are up 33.2%, and they are up 20.2% from Taiwan, 9.8% from South Korea, 9.7% from India, and 6.3% from Mexico. Once Congress passes the new version of NAFTA stronger trade ties with Canada and Mexico will result. Trade is moving forward, not dying.
  4. Since the tax cut was enacted at the end of 2017, “real” (inflation-adjusted) business investment in equipment has grown at a 3.4% annual rate, while real business fixed investment (equipment, structures, and intellectual property) has grown at a 4.5% annual rate. These are respectable numbers. It was inventories that held down GDP growth back in Q2, and this can’t last with a strong consumer.
  5. Moreover, productivity growth (the growth in worker output per hour) has accelerated, growing at a 1.7% annualized rate since the start of 2018 (and up at a faster 2.9% annualized rate so far in 2019), versus a 0.9% annualized rate for the four years ending in 2016.

Lots of folks worry about a recession.  Some people have been obsessing about the next recession since the moment the last one ended.  In our opinion, it would seem that for every data point that signals a slowdown, there are nine that do not.  For example, a soft 130,000 gain in headline payroll growth for August dominated headlines in recent weeks, but civilian employment (which includes small business) surged 590,000, wage growth picked up, labor force participation moved higher, initial claims remained low, and auto and truck sales rose. Not exactly negative news.   

Bottom line, if someone has an axe to grind about the US economy, we’re sure they’ll see a recession in whatever blot or piece of data they look at. They can always find something to worry about. Nonetheless, we continue to believe that optimism should be the default position for investors when it comes to the US.