Calls for a U.S. Recession Are Premature

Aug. 16, 2019
Bob Adelmann

In May of 1897, an English correspondent for the New York Journal, Frank Marshall White, contacted Mark Twain who was in London at the time to inquire after his health. White's editors had heard a rumor that Twain was on his deathbed. On May 31, Twain responded to White:

I can understand perfectly how the report of my illness got about. I have even heard on good authority that I was dead. James Ross Clemens, a cousin of mine, was seriously ill two or three weeks ago in London but [he] is well now. The report of my illness grew out of his illness.

The report of my death was an exaggeration.

Investors on Wall Street know exactly how Twain (a pen name adopted by humorist Samuel Langhorne Clemens) felt. Reports from the Wall Street Journal, tweets from President Trump, riots in Hong Kong, etc. set the stage for an 800-point drop in the Dow on Wednesday.

The rumors seemed to have substance. On Wednesday the Journal reported that "early indicators and business sentiment indicators point to another weak performance in the third quarter. That could potentially indicate a recession…." It backed it up by noting that Germany's economy went negative in the quarter that ended in June, while the jobless rate in China's largest cities hit the highest level seen since such reporting began. Other data on China's factory production, consumer spending, property investment, and "other key readings" were all "lower than expected," said the Journal.

Given the opacity of data coming from Chinese government sources, the Journal looked at exports to China from the eurozone (19 of the 28 countries making up the European Union) and reported that they slowed to a barely perceptible increase of 1.5 percent in the first five months of the year. The Journal quoted Germany's economic minister Peter Altmaier: "The new figures are a wake-up call and a warning. We are in a weak growth phase but not yet in a recession." All Germany needs is another negative quarter and the classical definition of a recession there will have been met.

The next day, the Journal reported on an internal poll it had taken of a number of economic gurus who, looking into their crystal balls, declared that the odds of a recession in the next 12 months had risen to 33.6 percent, up from 30.1 percent in July. All this proves is that when predicting the future, it pays to be accurate to at least three decimal places!

And then there was the "yield curve inversion" that lit up warning lights in all of those crystal balls: the sky is falling, the inversion has predicted nine of the last five recessions, head for the hills!

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Add in tweets from the president and the riots in Hong Kong, and it's a wonder that stocks didn't fall further on Wednesday!

Sensibility arrived on Thursday, just in time. MarketWatch quieted the waters with its analysis of how Wall Street reacted to previous such "inversions":

On average, the S&P 500 has returned 2.5% after a yield-curve inversion in the three months after the episode, while it has gained 4.87% in the following six months, 13.48% a year after, 14.73% in the following two years, and 16.41% three years out, according to Dow Jones Market Data.

A look back revealed that the inversion was temporary, reflecting not a coming recession but a surge of foreign bond buyers flocking to U.S. treasuries because they pay interest at rates far above those available from foreign governments.

Then came Walmart, which reported on Thursday that its second-quarter earnings beat expectations. A proxy for the overall U.S. economy because of its enormous size – 1.5 million employees in the US manning more than 3,500 Supercenters generating more than half a trillion dollars in gross sales – the company not only said that results beat expectations but reported that same-store sales grew by 2.8 percent. This knocked the hat off predictions that the U.S. economy was slowing to below two percent, far away from (as the talking heads were delighted to note) Trump's promise of three percent growth under his tender ministrations. To add to those prognosticators' discontent, Walmart expects U.S. same-store sales to rise "to the upper end of the 2.5% to 3.0% range" for fiscal year 2020.

Two reports from Federal Reserve banks added to their chagrin: the Philadelphia Federal Reserve Bank reported on Thursday that its manufacturing index came in at 21.8, far ahead of prognosticators' prediction of 11.1. And the New York Fed's Empire State manufacturing index rose to 4.8 versus naysayer's expectations of a drop to 2.5.

Finally, productivity of U.S. workers – GDP per worker – rose at a solid 2.3 percent rate versus estimates of just a 1.5 percent improvement.

No real damage was done. The bull market remains in place. The only damage done was to forecasters' credibility. As John Maynard Keynes famously said, "The only function of economic forecasting is to make astrology look respectable."



Reports of Mark Twain's quip about his death are greatly misquoted...

The Wall Street Journal: Warning Signs Point to a Global Slowdown Walmart shares jump after earnings beat After the yield curve inverts – here's how the stock market tends to perform since 1978

The Wall Street Journal: Warning Signs Point to a Global Slowdown

The Wall Street Journal: Poor Chinese and German Economic Data Fan Fears of Global Slowdown Retail Sales, Other Key Data Ease Economic Growth Fears

Definition of productivity

John Maynard Keynes' quote

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