Is a recession coming soon?
In 1936, British statesman Sir Austen Chamberlain (half-brother of Neville Chamberlain), made a speech in which he said: “It is not so long ago that a member of the Diplomatic Body in London, who had spent some years of his service in China, told me that there was a Chinese curse which took the form of saying, ‘May you live in interesting times.’ There is no doubt that the curse has fallen on us.” “We move from one crisis to another. We suffer one disturbance and shock after another.”
The last comments seem aptly to reflect the last few days and weeks of 2018.
Let me address one important question: is the stock market, which has now declined almost 20% from its high earlier in the year, telling us that a recession is coming soon, or is it just correcting from a sugar high after the huge stimulus from tax cuts and Government spending increases?
And if a recession is coming, what does that mean for the housing market?
In the interests of brevity I shall offer comments in note form:
1. According to many estimates, computer trading accounts for anywhere from 50-60% of equity trading in normal times to 90% on volatile days.Computer trading tends to exacerbate movements, both up and down.
2. The corporate tax cut produced a significant growth in after-tax earnings as companies reported results earlier in the year, leading some analysts to project valuations based on those one-time gains. As it has become clear that corporate earnings growth will return to more normal levels in 2019 so the stock market has corrected to a more sustainable valuation.
3. The Federal Reserve’s mandate from Congress is to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. Nowhere does it say that the Federal Reserve should seek to boost stock market prices.The late Fed Chairman William McChesney Martin famously said the Fed’s job was “to take away the punch bowl just as the party gets going.”
4. Following the Great Recession the Federal Reserve embarked on a policy known as Quantitative Easing in which it bought Government and other securities in great volumes to inject liquidity into the economy and drive down interest rates to stimulate growth. Those who argue now that the Fed kept the spigot open too long – which it probably did – may be forgetting that for a long time, as Congress failed to enact fiscal policy to stimulate economic growth, monetary policy carried out by the Fed was the only game in town.
5. In February I published What will happen to Home Prices in the Experimental Economy?. The Experimental Economy was the name I gave to the concept of providing a massive fiscal stimulus to an economy nearing full employment. In the article I wrote:”Those who are predicting that strong growth will follow from the major stimulus to the economy may be proved right. If not, the risk is that stimulating the economy at a time of full employment will cause the Fed to raise interest rates aggressively and choke off the hoped for economic growth.”
6. While the increase in the Fed Funds rate has been getting a lot of publicity very recently, the Fed has actually been raising rates – and indicating that it planned to continue to do so – for 3 years, with the first increase coming in December 2015.It could be argued that the more rapid increase in rates this year has been in response to the major stimulus from the tax cuts earlier in the year. It could further be argued that, on the evidence so far, the Fed has been successful in helping to slow growth to a sustainable level, thereby curbing inflationary pressures which would necessitate even higher interest rates.
7. Another part of the reason that economic growth is slowing from 4.2% in Q2 this year to 3.5% in Q3 and an estimated 2.7% in Q4 is the higher costs – and uncertainty – caused by the imposition of tariffs and the “tariff war” embarked on with China. Uncertainty acts to inhibit investment decisions.
8. The economy is still strong as evidenced by the 3.7% unemployment rate and widespread reports of the lack of applicants for job vacancies.
9. Perhaps the strongest sector of the economy has been consumer spending, which by many estimates accounts for 70% of the economy.
There is a saying in real estate that buyers buy with emotion and justify with logic. The key – both to real estate prices and to the path for the economy – is the level of consumer confidence. While all recorded reports show that level currently to be high, consumer confidence can also be very fragile.
It is too early to project the impact of the daily bombardment of announcements of policies which do not appear to have been given careful thought and analysis, but a period of silence would do a great deal to help restore confidence. That may be wishful thinking, but confidence is a fickle thing.
At the moment it is intact. As long as that remains so the likelihood for 2019 is a slowing, but still growing, economy and a stable housing market.
Sagan Harborside Sotheby’s International Realty