The economy is doing just fine. It is, however, very late in the cycle and therefore it’s time to be cautious.
Cycles come and go. This one will as well. We are in the late stages of what is likely to become the longest recovery/expansion in American history. And current economic policies have allowed the expansion to accelerate.
But the high rate of growth the country enjoyed for most of 2018 will slow to more sustainable rates in 2019. Unless there is some outside shock to the system, the economy is likely to continue to grow at a decelerating rate through 2019. A combination of tax cuts, continued fiscal stimulus, strong plant and equipment spending and few significant imbalances — combined with what is likely not going to be a significant trade war with China — should keep things moving.
Can the partial shutdown of the federal government hurt growth? Sure it can. It will probably lower growth by one-10th of 1 percent for each week it is in place. The bigger threat, though, is a change in consumer sentiment from positive to negative. Consumer and business psychology play a significant role later in cycles.
But the basic underlying data suggest that it will take more than what is currently on the horizon to push 2019 into the negative column. Expansions don’t die of old age. They die because of credit cycles becoming too tight, asset bubbles or some unusual event, such as oil embargoes or wars. None of those things are a major problem yet. Since things can change quickly late in a cycle, this bears watching.
Let’s look at where we stand. First, the good news. Leading indicators continue upward. Consumer confidence recently declined but still remains at what are high levels by historic standards. The Fed’s recession indicator is below levels that historically have been associated with downturns. Inflation is under control, so the Fed is likely to tread lightly at the present time. The average consumer is in good financial shape. There is lots of fiscal stimulus. And there are almost 7 million unfilled jobs in America at present.
So what keeps me up at night?
While consumer debt, except for student loan debt, is in good shape, corporate debt seems high. A slowdown could push down corporate earnings more than normal. Employment has been growing much faster than the labor force since 2011. We are facing a labor shortage in many fields.
The 7 million unfilled jobs mentioned above can also be looked at as an issue. This is because the lack of labor will push up the employment cost index. It would push up inflation and cause the Fed to raise rates. This tightening, if not done expertly, could push the economy into negative territory at some point.
Already, the recent increases in rates have had a negative effect on housing affordability and pushed down housing starts. It is tight money caused by the Fed trying to slow the economy to stem inflation that is likely to start the next recession when it does occur.
Note that I did not include the stock market as a negative. The recent volatility in financial markets certainly affects consumer confidence. Yet it is not a good predictor of the economy. There have been 37 corrections (a decline of 10 percent to 20 percent) in the stock market since the end of World War II. Twelve have been followed by a recession. Twenty-five have not. The same is true for bear markets (a decline of 20 percent or more). There have been 11 bear markets over that period. Seven have been associated with a recession. Four have not.
People have very short-term memories when it comes to things financial and economic. When they think of a recession, most people think of 2007-2009, but not all recessions are the same. Only three of the last 11 contractions going back to World War II have been severe in that they lasted more than a year. Eight were mild in terms of length and depth. Those eight lasted only eight to 11 months each. The three longer ones were brought on by unusual factors. In 1973-1975 there was an oil embargo, wage and price controls and the U.S. left the gold standard. In 1981-1982, the Fed had to deal with double-digit inflation. And in 2007-2008, the housing bubble created the worst economy since the 1930s.
The point is that the next cycle is not likely to resemble 2007-2009. Any slowdown is likely to be short and shallow when it does come.
So with all of this mixed news, how do things look? This year is likely to be a year of continued but slower growth. Economic news will be mixed. But there is presently so much fuel in the economy that the probability of a recession this year is relatively low. We are probably in the eighth inning of what has been a very long game. And the chances of a significant slowdown seem limited at present.
How does Greater Phoenix look? Very good. The area was the fourth most rapidly growing major employment market in the country in 2018. It grew by 3.3 percent. Between December 2017 and December 2018, Greater Phoenix added a whopping 67,000 jobs. The housing market for the year was up. The November/December slowdown appears to be transitory. The area is bringing in a number of quality jobs.
And population, while lower than historic norms due to national factors such as a lower birth rate and fewer people moving between states, is still doing well. Almost 7 percent of those who moved between states, between counties and from abroad ended up in Arizona. For a state that accounts for about 2 percent of the country’s population, that is very positive news.
Overall, the outlook for Greater Phoenix remains very positive going into 2019. While the rate of growth is likely to slow with the slower national growth rate, it is likely to continue to be one of the best performing major markets in the U.S. JN
Elliott Pollack is CEO of Elliott D. Pollack and Company, an economic and real estate consulting firm in Scottsdale.