The consensus outlook for the US economy has become increasingly fearful in recent months.
In particular, the bears point to:
- Renewed trade war concerns (which are damaging confidence);
- At a time when signs of heightened recession risk are emerging. Those signs include (a) inversions in parts of the US yield curve; (b) a warning from the New York Fed’s recession indicator; and (c) a general deterioration in US economic data.
For the bears on the US economy, Fed easing (expected from July onwards) also adds to their case for heightened recession risk: Indeed, in 4 out of the past 5 recessions, the Fed started cutting rates a handful of quarters before the recession began. They therefore argue that the Fed has already overtightened monetary policy, and has therefore already ‘burst bubbles’ in the US economy.
For the bulls, though, recent weakness in the US economy is nothing more sinister than a mini (late cycle) soft patch, which we’ve described as a bout of ‘Eat, Sleep, Rinse, Repeat’ (for detail see 1st June 2018 LV on Friday). If correct, that weakness should be resolved by some Fed easing, which would then extend this economic cycle (as it probably did, for example, in the mid/late 1990s as well as more recently in this cycle).
In our view, the latter of those two scenarios is the most likely (i.e. recent weakness is a mini-cycle slowdown). In this interview, Harry Colvin outlines the view on the US economy.
See original video HERE.