Economic Expansion Might Chug Past Trade Spats, Tweets

A key economic sign that has been one of the most reliable predictors of recession occurring within 12 to 18 months might not apply in the current era, and other evidence is thin that a recession will arrive in the next 12 to 18 months, according to a CUNA report released Monday.

“The current yield curve inversion, which tends to be a good predictor of economic activity, doesn’t in this case necessarily mean that the longest expansion in modern U.S. history will end in the near future,” said Mike Schenk, CUNA’s VP of economics and statistics.

“Consumers are likely to be more cautious in the current environment, but there isn’t a lot of compelling evidence that they’ll be retrenching,” he said. “It seems reasonable to continue to expect credit unions will see decent, though slower, loan growth, high asset quality, and healthy bottom-line results over the next 12 to 18 months.”

Also, leading economic indicator indices, such as the Philadelphia Federal Reserve’s index, have been holding steady.

“This suggests the economy may continue to chug along, despite increasing headwinds,” Schenk said.

Schenk recorded CUNA’s monthly Economic Outlook video Aug. 20, three days before Trump declared he was “the chosen one” to take on China in a trade war, leading to vows of higher tariffs by both countries during the G-7 meeting in France that ended Monday.

But in an email Monday, Schenk wrote that the outlook hasn’t changed much because it is largely based on the soundness of consumers, who account for 70% of U.S. economic activity.

“Consumers are in good shape financially —with stable jobs, good job prospects, rising wages, low debt, rising home prices etc…

“If consumers continue to shrug off the Tweets they’re likely to continue to spend and borrow,” he said. “If there’s a more obvious shift in the consumer psyche than we’ve seen recently then the risk of recession will likewise increase.”

In the 15-minute video, Schenk said escalating tariffs and trade threats have alarmed bond investors, who generally see the actions as a threat to continued economic expansion both here and abroad.

The yield on 10-year Treasury bonds continues running below yields on 3-month notes, an inversion that began May 23, and widened to 45 basis points on Friday. Every recession since 1955 has been preceded by about a year by such inverted yields.

“The yield curve is one of our most reliable recession predictors,” Schenk said.

But he said this time might be different.

For one thing, the usual inflation that accompanies an inversion isn’t happening this time.

“This inversion is truly different, caused not by an overly aggressive Fed aimed at slowing growth, but by flight to safety amongst longer-term investors,” Schenk said.

The Fed’s large-scale purchases of long-term bonds in the wake of the Great Recession might have artificially depressed yields by 150 basis points. Without that effect, Schenk said, “the yield curve probably wouldn’t be inverted.”

That brings CUNA’s focus back to the consumer.

The Michigan Consumer Confidence index in August was 92.1, down from 98.2 in July and the second-lowest reading of the year.

“Consumer confidence has a taken a hit in recent months because of the government shutdown, trade war, stock market volatility and increasing uncertainty generally.

Yet, compared with past decades, August’s reading is fairly high.

“Consumers are still pretty confident, and that suggests that they’re likely to stay engaged despite the inverted yield curve,” he said.

“However, it’s important to remember that confidence can and does change quickly, especially if the political or economic situation changes drastically in a short period of time,” he said. “In this regard, fewer rather than more Tweets would probably be helpful.”