“The political novice and general societal delinquent would trigger a recession,” New York Times columnist and Nobel laureate economist Paul Krugman wrote about Donald Trump a couple of years ago, and he continues to write similar columns to this day.
Krugman is a peddler of “Never Trump” rhetoric, and he’s been predicting the apocalypse ever since Trump won the 2016 election to become the 45th president of the United States.
Senior Forbes contributor Kenneth Rapoza, who writes about business and investing in emerging markets, says Krugman has once again been exposed: There is no recession on the horizon. Not now, and not in 2020.
Here’s why, Rapoza writes:
“The earnings season is coming in healthier than people expected three weeks ago. Most companies’ earnings are coming in better than we thought,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman in New York. “We see no earnings recession coming at us. The highs in the S&P are similar to where we were in October. The economy is a bit better, interest rates are lower and the likelihood of a very aggressive Fed is remote. All of that is supportive of growth. No recession next year.”
As everyone now knows, the U.S. economy grew 3.2% in the first quarter, beating the consensus forecast. When the economy was growing at similar numbers in Trump’s first quarters in office, guys like Krugman explained it all away as merely a by-product of the Obama Administration.
The Obama presidency must still be serving us leftovers.
Growth came thanks to tax cuts, followed by regulatory rollback, which helped some industries.
Rapoza also notes that while the S&P 500 is a poor indicator of the true economic sentiment on Main Street, Wall Street’s confidence is telling: Big investors believe the Fed has gone dovish, with no rate hikes this year after previous predictions of three or four.
The CME FedWatch Tool is giving a 50+% probability of a rate cut at the October 2019 Fed meeting. Prudent investors won’t count on that, especially if China is still in stimulus mode and U.S. wages hold steady or push higher.
The IMF increased its forecast for China’s GDP two weeks ago to 6.3% from 6.2%.
March industrial profits in China increased 13.9% year-over-year to around $87 billion, according to the National Bureau of Statistics in Beijing. Too much good news could lead to less stimulus. Still, none of this looks like a recession.
Of course, it can be argued that the U.S. and China are in a late-stage economic cycle and need help. This summer will mark the tenth year of expansion for the U.S. economy. If this continues next year, Trump and the Fed would have helped the U.S. beat an economic record.
“Without the Fed’s pause, it would have been impossible for markets to rally on from a weakened fourth quarter,” says Vlad Signorelli, head of macroeconomic research firm Bretton Woods Research in Long Valley, New Jersey. “GDP would have weakened.”
The Fed’s decision to put rake hikes on hold allowed the Republican tax cuts to work into an economy no longer threatened by a more contractionary rate policy. Today, rate hike probabilities going into January 2020 are at zero.
Wall Street expects GDP to hover around 2.5% each quarter for the rest of 2019, and the economy ended the first quarter with a 3.8% unemployment rate as annual wage growth topped out at an impressive 3.4% in February, the fastest rate since early 2009.
Unemployment under 4% is good for Trump’s rhetoric of putting women, minorities and job-thirsty working class Americans to work. All of that improves his odds of reelection in 2020, despite generally weak approval numbers.
The global economy, an economy that was supposed to fall off a cliff following the imposition of tariffs on China, seems to be in good working order. Not only is there no recession in sight here at home, but there is no recession on the horizon in China either.
Rapoza closes by saying global investors should pay careful attention to what central banks are doing in other countries.
If they follow the Fed’s lead in acknowledging that there is no need to rush out ahead of inflation by raising interest rates, then capital costs will fall in emerging markets. That’s generally growth inducive and throws yet another monkey wrench into that clunky old recession machine.
