3 Signs The Economy Has Hit A Plateau

Industry leaders don’t need a crystal ball to see the future. It’s written in auto, jobs, and housing.

 
 

The trade war with China is officially “on.” At least, it is as of this writing, but by the time this is published the story could be different. My crystal ball is in the shop, so let’s look at both possibilities.

If the tariffs by the United States and countermeasures by China are in place, the U.S. economy should start seeing negative effects by the end of the year. The United States has a domestic-centric economy, and it will not turn on a dime. The economy improved last year before the tax cut, and it’s still working off the benefits to corporations. But how the stock market reacts to tariffs will impact business confidence.

 

 

The surge in confidence, for both businesses and consumers, after the election was based on the upward explosion of stock prices. Businesses felt comfortable spending and hiring for the future, anticipating the benefits from lower taxes. A loss of confidence — such as from a trade war — that will cause stocks to retreat will also cause businesses to scale back and save for a rainy day. Ditto for consumers.

Most sectors of the economy are at levels that are comfortable but no longer growing. That lack of growth will begin to worry businesses early next year — with or without a trade deal.

Dwight Johnston, President, Dwight Johnston Economics

As for when a recession might come, your guess is as good as anyone’s. Mine would be for an extended slowdown, with a recession officially being called in the fourth quarter of 2019. Now let’s imagine a world where the trade war is averted.

Sounds great, right? Onward and upward for who knows how long!

I don’t want to rain on anyone’s parade, but I believe the economy would still face a slowdown next year. It might come later than it would if we were in a trade war, and it might not be as deep, but the odds still favor a slowdown.

wish I could point you to specific charts or databases to support that case, but I can’t. I can, however, give you my reasoning and hopefully something to think about.

Yes, a China solution would lead to a big short-term stock rally and perhaps allay any growing fears on the part of businesses. But will that lead to another spending boom? I don’t believe it will, and I believe the economy is already showing signals it is getting somewhat maxed out.

Let’s look at autos, jobs, and housing. Auto sales are good, but sales are down slightly from last year. Looking back over three years, it’s clear that sales have plateaued and there is little reason to expect a boost. Employment numbers remain solid, but the labor pool is too shallow to handle a surge in growth. And businesses are not providing training to fix the skills mismatch that is holding down employment growth.

This year’s selling season for homes was a bit of a disappointment, too. Tight supply explains some of the weakness, but that’s not the full story. Many potential buyers are simply walking away after getting frustrated with trying to buy in a hot market. Prices are simply too high in many markets to sustain growth. One area that shows real evidence of slowing, not based on tight supply, is in the sales of new homes. New home sales have struggled the past few months, even with an increase in homes available for sale. The supply of new homes on the market has reached a normal supply for the first time since 2008. Sales aren’t terrible; they’re just flat.

The theme here is “plateauing.”

Most sectors of the economy are at levels that are comfortable but no longer growing. That lack of growth will begin to worry businesses early next year — with or without a trade deal.

The tax deal is done, and the deficit is too big for more fiscal stimulus. What could take the United States to the next level? Right now, I don’t know.

The trade issue is important, but its role is in how fast we get to the next crucial stage of the economy. It likely won’t matter for our ultimate destination.

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.

 

Oct. 1, 2018


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