We Told You That The Economy Was Slowing Down, Right?

Posted by Vident Financial on 3/5/19 10:06 AM

I'm an economist, not a paid political spokesman (nor a paid political spokesman pretending to be an economist). I gave the Trump/Kudlow/Ryan tax cuts full props for the boom we got in 2018. But I also warned that the effects of the tax cut were wearing off.

The recent GDP data show growth rates dropping from 3.4 to 2.6 percent in the fourth quarter.

gdp FRED

(Source: St. Louis Fed)

Deferred tax cuts cause booms that are partly an effect of deferred activity and of changed long-term incentives. The first part wears off in about a year. Plus, the economy has two headwinds: the Fed is raising interest rates, which has some subsequent effects. I'm not saying that normalizing interest rates is a bad thing, but I am arguing that it is a headwind. As an aside, my views on interest rate normalization are identical no matter who is president. Interest rate suppression is interest rate suppression. The other headwind is our (so far) small scale trade war.

Guess which parts of the economy gave us trouble last quarter... Residential housing (sensitive to interest rates), and trade balances. The current quarter doesn't look to be much of a rebound either; the consensus of forecasters is weak, but not recessionary. Supply managers for manufacturing firms recently registered another drop in optimism. Markets are a bit more optimistic, though. So splitting the difference between markets, and experts, leaves this quarter looking pretty similar to last quarter. Various interest rate metrics, real rates (which represent growth expectations isolated from inflation expectations) are signaling that we're still in slow mode.

real interest rates

(Source: St. Louis Fed)

So do the spreads between 'junk' bonds and treasuries.

junk bond treasury spread

(Source: St. Louis Fed)

However, stock investors have been signaling more optimism.

The bottom line is that the world runs on principles, not parties. Investors need to focus on the actual leadership and governance of our leaders, not team loyalty. That approach is what allowed us to see that the economy was slowing without stalling.

Topics: Economics, Taxes

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