FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 4, 2020

IN THIS ISSUE:

1. US Economy Grew By 2.3% In 2019, Down From 2.9%

2. US Consumer Confidence Remains Strong For Now

3. Gallup: US Economic Confidence Highest Since 2000

4. Why Recession Could Unfold Sooner Than We Think

Overview

Today we’ll look at last week’s initial report on 4Q US Gross Domestic Product which came in about as expected. It showed that while growth remained positive, it was below the pace in 2018. We’ll also take a look at the latest report on US consumer confidence and a new Gallup poll which found that consumers’ confidence in the US economy is the strongest since 2000.

While I remain confident in the US economy as well, I am going to summarize the bears’ argument that a recession is coming sooner rather than later – and maybe this year. Along this line, I believe we should all keep a very close watch on the coronavirus outbreak. The markets freaked out over it last week, and this could continue, especially if the news gets worse.

US Economy Grew By 2.3% In 2019, Down From 2.9%

The Commerce Department reported last week that 4Q Gross Domestic Product expanded at an annual rate of 2.1%, in line with pre-report expectations. For all of 2019, GDP rose by 2.3%, down from 2.9% in 2018 and 2.4% in 2017.

While growth of 2.3% last year may not seem impressive, it is at least a little higher than our post-war average of around 2%. Of the economists surveyed by sources such as the Wall Street Journal, Barron’s and others, most expect US GDP to slow to around 1.8% in 2020.

Some forecasters I read, including Brian Wesbury and his team at First Trust, believe GDP growth could reach 2.5%-3.0% this year. While that is above the consensus forecast of 1.8%, it would not surprise me if US GDP comes in well above 2% this year – assuming the coronavirus does not become a global pandemic.

The mainstream media, as you might expect, focused on the fact that last week’s GDP report showed economic growth last year came in well below President Trump’s forecasts of 3%-4% GDP growth when he was running for office. I would point out that few forecasters believed Mr. Trump’s glowing forecasts for the economy.

The bottom line is the US economy, even at 2.3% last year, remains perhaps the strongest in the developed world. How it performs going forward depends, as always, on US consumer spending, which accounts for apprx. 70% of Gross Domestic Product. And that depends on consumer confidence, which we’ll take a look at below.

US Consumer Confidence Remains Strong For Now

Consumer confidence remains quite strong as you can see in the chart below; however, it seems to have leveled off the last couple of years. Should confidence remain in this lofty range, it should be sufficient to keep the US economy growing by near 2% or better this year and possibly next year as well, assuming no big negative surprises.

The main question at the moment is the coronavirus and whether it can be contained. While US health officials tell us that the odds are quite low that the virus will spread across America, it is impossible to rule anything out at this early stage. If in the weeks ahead it looks like the virus is going to spread in the US, then I would expect consumer confidence to take a hit.

Most of the coronavirus cases thus far have been among Americans who traveled to China recently. One reported case so far of human-to-human transmission in the US was confirmed by the Centers For Disease Control (CDC) on Thursday (Jan. 30). It was in the Chicago area where a woman who had traveled to Wuhan China infected her husband.

The news of the virus spreading rapidly across the globe and the human-to-human contact case noted above tanked the US stock markets late last week, with the Dow Jones plunging just over 600 points last Friday. The Dow rebounded on Monday, but this scare may not be over yet.

Gallup: US Economic Confidence Highest Since 2000

Americans' confidence in the US economy is higher than at any point in about two decades. The latest figure from Gallup's Economic Confidence Index is +40, the highest reading recorded since +44 in October 2000.

Americans' buoyant confidence in the economy in Gallup's latest poll, conducted January 2-15, likely reflects the US unemployment rate continuing to stay at a 50-year low. Around that same time, the US stock markets rose to record highs, with the Dow Jones flirting with reaching the 30,000 level.

Gallup's Economic Confidence Index is the average of two components: Americans' ratings of current economic conditions and their views on whether the economy is getting better or getting worse. The latest reading of 40 is the highest since the financial crisis of 2008.

However, I think it’s safe to say that Gallup’s Economic Confidence Index would be lower if the same survey were taken today, due to the troubling coronavirus outbreak since this poll was taken in the first half of last month. I bring this news to your attention only to illustrate that Americans have been getting more and more confident in the economy in recent years.

If, I hope and pray, there is some good news on the coronavirus just ahead, I expect this trend in the public’s confidence to resume. If, on the other hand, the virus worsens, it will be bad news for the economy and the equity markets.

Why Recession Could Unfold Sooner Than We Think

As regular readers know, I have been bullish on the US economy for many years, and I still am. Yet there is no way to know how negatively consumers will react if the coronavirus intensifies just ahead. Even before the coronavirus news worsened, there were some telltale signs the economic expansion might be losing momentum. I’ll summarize them for you below.

Several economic indicators have been disappointing over the last two months: the ISM Manufacturing Index, Durable Goods Orders, Retail Sales, Leading Economic Indicators and Existing Home Sales have all been lower or below expectations in December and early January.

Individually, each of the economic reports noted above would not normally be a sign that a recession is coming soon. Yet collectively, they are worrisome, especially since these are some of the first indicators to weaken ahead of recessions. And this was all happening before the coronavirus became a global concern over the last few weeks.

The Fed repeated its argument last week that “the economy is doing well because consumer spending and the labor market are strong.” And they are right – for now. Real personal consumption is growing at a reasonably healthy 2.4% (annual rate), and the 3.5% unemployment rate is near a 50-year low. Yet the problem is that these are often the LAST segments of the economy to falter historically at the start of a recession.

Put differently, consumers and the labor market should still be strong. The question is, for how much longer? In other words, there is an expected gap of time from when leading indicators such as those listed above show weakness to when coincident indicators (consumer spending and labor) show weakness.

Historically, one of two things happens at or near this point in the economic cycle: Either the leading indicators (manufacturing, durable goods, retail sales, etc.) turn higher once again, and the economic expansion continues; or consumer spending and labor turn lower – and we go into a recession.

This is why what happens with the coronavirus is so critical just ahead, for the US and the world!

Here’s another troubling indicator: The Citigroup U.S. Surprise Index – which measures how far the aggregate of economic reports are above or below where economists estimate them to be – has fallen in recent months.

When the Surprise Index is negative, it means that the majority of economic reports are coming in below expectations, while a positive reading indicates that most data is coming in above expectations. As you can see in the chart, the Index has fallen dramatically since October of last year and has been mostly negative so far this year – thus increasing the odds for a recession.

The discussion above is not intended as a comprehensive analysis of the odds of a recession just ahead, but these are the most common talking points. As I have pointed out often, it is impossible to know when the next recession will arrive, but it may be sooner rather than later if the coronavirus worsens.

In any event, I continue to urge my readers who are largely invested in “buy and hold” strategies and index funds (that will get slammed in a recession) to seriously consider the actively managed programs we offer at Halbert Wealth Management, before it’s too late. Think about it and give us a call at 800-348-3601.

Finally, in case you missed it, be sure to read my BLOG from last week. In it, I explain how the recently passed SECURE Act will affect your retirement going forward. There are big new changes, and all Americans in or near retirement need to understand this. While you’re at it, go ahead and subscribe to my free weekly Blog if you have not already.

All the best,

Gary D. Halbert

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