Three Quarters In, What’s The End Game?

Lost momentum is hard to get back, and the loss of forward momentum in the U.S. economy has become entrenched.

Even casual football fans can recall a time in which one team had a considerable lead at halftime but lost momentum in the third quarter and ended up losing the game.

This is an apt metaphor for the U.S. economy and stock market.

The stock market came roaring out of the gate on Trump’s election, causing business confidence and with it spending and hiring to pick up in 2017. But when the drums of the trade war started beating in February of 2018, the stock market and the economy lost Big Mo.

There were some bright spots over the summer months, but the negative trade headlines that dominated the news cycle in the fourth quarter drained the stock market and big business of confidence and dashed any hope that momentum would return.


Although the current economic numbers are good, the upward momentum is gone. Some sectors are even in decline.

Auto sales are down approximately 500,000 from 2017. Home sales have fallen sharply, and the thin supply of homes on the market isn’t all to blame. In fact, new home supply is higher than a healthy balance requires. Jobs data has been good, but gains in the monthly average payroll are slipping. Retail sales are still running at a healthy pace roughly 4% on a year-over-year basis but that is down from the 6.0%-6.5% pace from April through August of 2018.

The upward slope of the past few year s has plateaued or i s trending down.

If the U.S. trade war with China continues to heat up, the downward slope will steepen. Uncertainty is a momentum killer, and the longer there is uncertainly around trade, the harder it will be to recover from the damage.

Uncertainty is a momentum killer, and the longer there is uncertainty around trade, the harder it will be to recover from the damage.

Unfortunately, a resolution of the trade war will only delay the inevitable economic slowdown. Stocks will rally, but I suspect it will be a short-term event. I wrote about some of these things in the last quarterly issue of Credit Union Strategy & Performance, and I believe the loss of forward momentum has become entrenched. Once you lose momentum in a market or economy, it’s hard to get it back.

I expect we’ve seen the last rate raise from the Fed for at least two years. In fact, I think we’ll see one or two easing moves in 2019 and more beyond. I also believe we’ll see longer-term rates decline but only marginally. The massive supply/demand shift in the bond market will limit rate declines even in a weaker economic environment. Exploding deficits will continue to cause exploding treasury issuance, which will be difficult to overcome. The long end of the bond market is still no bargain.

Of course, I could be wrong. What would it take to turn this prediction around? What would the economic and interest landscape need to look like?

First, the United States needs to strike a real, good trade deal with China sooner rather than later. The stock market needs a big, sustained rally. Business confidence needs to be restored, and the companies that lowered their 2019 earnings projections late in 2018 need to raise them once again. The housing market needs to trend higher, and auto sales need to move up a level after last year’s stall.

On the interest rate side, the Fed needs to tighten three times by the end of 2019, and the 10-year yield needs to move close to 4%. Credit union lending needs to remain strong, but interest rate risk might be a concern.

I hope I’m wrong in forecasting a weaker economy. If I am off, we’ll all be better off. But I’m relatively confident in my outlook, so ready those slowdown strategies. After all, downside momentum can be just as strong as upside momentum.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.

January 1, 2019

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