CONTINUING THE BALANCING ACT: The U.S. Federal Reserve Bank has two stated goals, full employment and price stability. While there are still areas of labor underperformance across the country, for all practical purposes the Fed has achieved its twin objectives. Unemployment and inflation numbers look very good. Moving forward, the Fed must strike a balance. If it raises rates and tightens money supply too quickly, it will choke off the expansion. If it raises rates too slowly, the economy will overheat and inflation could get too high. The Fed meets on Wednesday, and it will probably raise interest rates another quarter of a percentage point. In fact, investors have already figured this in. It is also highly likely, if the economy continues to move in a positive direction, that there will be another rate hike in December.
STOCKS MOVE HIGHER: Earlier this year, fears of inflation and trade wars sent U.S. stocks tumbling downward. Those fears, although not far from investors’ consciousness, have apparently ebbed. U.S. stock indices have had a strong two week period with indices reaching new highs. Although tech companies have struggled of late, other sectors, and particularly the financial sector, have been quite strong. Trade battles will continue to test market optimism in the coming weeks, especially as between the U.S. and China.
TRADE NEWS: Last week, the UK’s proposal for a trade relations pact was rejected by the European Union. Meanwhile, the Chinese government canceled upcoming trade talks with the U.S. in what is now looking like a game of chicken.
TWO STORIES ON U.S. HOME SALES: It looks like the sales of existing homes has peaked. In November of last year, 5.72 million existing homes were sold, and this number has moved down or sideways ever since. The current number of existing homes sales (5.34 million in August) is at a reasonable level, so there is no cause for alarm that this number is not growing. However, new home sales have lagged existing home sales during this recovery and there is likely room to run in that market, giving builders the opportunity to add more homes to the market. With housing prices hovering close to pre-bubble highs and mortgage rates on the rise, affordability has been declining. New homes can help with this problem. Sales of new home are much more significant for the economy as the financial impact of a new home transaction is much higher than for an existing home.
ONE ANALYST SAYS: In the recent past, we provided you with information on the percentages of economists who believe the U.S. will go into a recession in 2019, 2020, 2021, or beyond. This week, we will focus on one. Bob Browne is the Chief Investment Officer at Northern Trust. He is obviously a smart fellow. He believes that a subdued recovery will continue for the next five years. He believes that modest growth is a chief reason why this recovery has lasted so long, and will continue. If the economy was growing faster, it would hit a recession sooner, he says. Why, despite the current faster pace, will we continue to have a subdued growth rate that does not hit a recession soon? He says that the main factors are 1) the demographics of an aging population, and 2) regulatory stabilizers in the banking sector that will not allow excessive lending/leverage to build up. In addition, in his opinion, the growing importance of the service sector “smooths out” peaks and valleys in the economy.
One piece of data backs up his sentiments to some degree. From November 1982 to March 1991, the U.S. had an extended recovery, and during those eight years, the economy grew by a cumulative 75%. In the extended recovery that lasted from 1991 to 2000, the cumulative growth was 74%. If the U.S. economy sustained a 3.8% growth rate for the next five years (something almost no one is predicting), that would translate into cumulative growth of 70% between June 2009 and June 2023.