The brutal stock downturn and indicators like the bond yield curve are signaling that a recession might be on its way. It must be that time again: Time for economists to make equivocal predictions, and journalists to equivocate madly writing about them. Neil Irwin of The New York Times feature “The Upshot” is here to make your uncertainty even more confusing.
“The Upshot” is supposed to be incisive, quantitative analysis. But economists are “on the one hand, on the other hand” kind of thinkers. (President Harry Truman supposedly longed for a one-handed economist.) In this environment, the journalist’s job is to make sense of predictions — “time will tell” is a sad cop-out.
The Economy Faces Big Risks in 2019. Markets Are Only Now Facing Up to Them.
One question people might be asking is, what took so long?
by Neil Irwin
After another week of exceptional volatility on Wall Street that has pummeled stock portfolios, there are two closely related questions worth asking.
First, why is this happening when the economy is so strong? The November jobs numbers released Friday showed the unemployment rate remains at a rock-bottom 3.7 percent amid healthy job creation, just the latest piece of economic data to come in relatively strong.
Second, what took so long? Why are markets just now recognizing the risks the economy faces in 2019, which have been obvious for months to anyone paying attention?
Commentary: OK, let me get this straight. This decline was a long time coming and the economy is in great shape? What’s the upshot, Neil? The time-honored technique of journalists facing an uncertain prediction is to ask a rhetorical question — and then never actually answer it. Irwin likes this technique so much that he asks two unanswerable rhetorical questions.
Translation: Some indicators point to a strong economy, other indicators point to risk. Why did this make the stock market dive? You got me.
The forces driving the recent swings — which have resulted in an 8 percent drop in the S&P 500 over the last two months, with some teeth-rattling ups and downs for stocks, bonds and major commodities along the way — are not anything new.
First, three years’ worth of interest rate increases by the Federal Reserve are finally starting to pinch interest-rate-sensitive sectors, particularly housing, the auto industry and companies with heavy debt loads. After years in which the economy has become heavily tilted toward industries that depend on low interest rates, a potentially painful rebalancing is underway.
Second, investors worry that the trade war between the United States and China could start to pinch corporate earnings and economic activity more than it has to date. But that conflict has been building throughout 2018.
Commentary: This is the first “could” in the article. Pay attention to the subjunctive here, because the central thesis of this article is that some things could happen, and could not happen. So what should you do about the things that could happen? That’s left as an exercise to the reader (and investor).
Translation: The stock market is down at this particular moment because of rising interest rates and possible trade wars which we’ve all seen coming for a year. Explaining and predicting stock market moves is a fool’s game anyway.
Third, the tax cut that has lifted corporate earnings and economic growth in 2018 won’t be repeated in 2019, meaning a harder slog for companies seeking higher profits. Growth will slow unless companies develop ways to extract greater productivity from their (increasingly hard to find) work force, which would be great for long-term economic prospects, but isn’t the kind of thing you want to count on.
Commentary: More equivocation. While Irwin has pointed to productivity as a key indicator, he’s loudly proclaiming his ignorance about where it’s going.
Translation: Could companies become more productive? Maybe.
So the answer to the first question, of why markets have become so turbulent when the economy is strong, is the simpler one. Markets look forward, and the risks looking forward seem increasingly ominous even as everything continues to go swimmingly, especially in the labor market, as 2018 nears its end.
Commentary: The stock market is down because people are worried about the value of stocks.
Translation: Everything is awesome. For now. But not so much in the future.
The second question is a little harder. All of these major risk factors have been openly discussed among economists and the financial press for the last year.
The consensus economic projections of Fed officials published one year ago show that they expected the economy to grow 2.5 percent in 2018 and 2.1 percent in 2019. If anything, they were too pessimistic about 2018, which now looks likely to be north of 3 percent.
But slower growth in 2019 and 2020 has been expected among mainstream economic forecasters ever since the tax legislation took shape a year ago.
Commentary: Ah, the passive voice emerges, along with the most equivocal passive of all, “is expected to.” Beware of predictions in the passive voice, since you don’t know who’s making them.
Translation: Economists thought the economy would grow less than it did. Now “mainstream economic forecasters” expect even less growth since the tax cut effects are done. These forecasts are always wrong, but I’m citing them anyway since they’re more credible than any prediction I would come up with.
“Nothing in economics and markets happens in a straight line or without lags and feedback effects,” said Blu Putnam, chief economist at the CME Group. “There are some big headwinds all coming from events in 2018 that we know about, but whose impacts are yet to be fully felt or appreciated.”
And knowing something bad will probably happen is not the same as knowing when. It evidently took another confusing series of developments in economic diplomacy between the United States and China for it to become clear.
“Most economists are good at analyzing fundamentals, but they know better than to forecast direction and timing in the same sentence,” Mr. Putnam said.
Commentary: Let’s quote Blu Putnam saying nobody knows what the heck is going to happen, whether something bad will happen, and when. Citing confused predictors is so enlightening. On the other hand, “Economists know better than to forecast direction and timing in the same sentence” ought to be on a plaque. It ought to be the title of this article, because it so effectively sums up what the article is about: nobody in economics knows bupkes about the future.
Translation: “I have no idea what’s going happen” said Blu Putnam, a guy who was willing to talk to me but has no idea what is going to happen.
Part of the agita on financial markets in the last few weeks has come from fears that the Fed has been underestimating these risks, and is dead set on raising interest rates several more times next year even as the economy is still trying to adjust to the early rounds of increases.
Those fears have eased some as Fed officials have signaled open-mindedness and flexibility about the path ahead in the last few days. But a tricky period for the Fed is only beginning.
Commentary: A tricky period? When is not a tricky period? The Fed uses data to determine what to do. Since the data’s not in yet, we don’t know what it will do. But it’s fun to talk about how scary it is that we don’t know.
Translation: Rates could go up in the next year, or not. It depends.
The optimistic case for 2019 is that a rebalancing of the economy is underway that will create both losers (interest-rate-sensitive industries and those that rely heavily on trade with China) and winners (everybody else).
The risk is that this handoff doesn’t happen as smoothly as an economic textbook might predict. There are always frictions that can leave certain regions and certain workers in a bad spot for extended periods.
Commentary: There’s that two-handed economist again, writing textbooks that don’t match the messiness of reality.
Translation: Things could be good. Things could be bad. Some people will suffer more than others. We just don’t know.
This episode, for example, could turn out to have similarities to what we’ve called the mini-recession of 2014 to 2016. The underlying causes are a bit different, but then, as now, prices of oil and agricultural commodities fell sharply, and makers of equipment that supply those industries saw plummeting business. It hit those sectors hard and dragged down overall growth, even if many people not in those industries didn’t notice it was happening.
Commentary: In order not to sound completely useless, the author cites an example that may or may not have anything to do with what’s happening today.
Translation: Maybe something that happened before will happen again in a way that’s sort of similar to what happened before in some parts of the economy. Or not.
The tricky thing for the Fed is that it must set its policies for the whole of the United States; it can’t set one interest rate for the service sector in big coastal cities and another for farm equipment makers in Iowa.
With the unemployment rate at its lowest level since 1969 and average hourly earnings starting to rise a bit more rapidly, all the traditional signals point to continued interest rate increases being justified.
So what markets have right is that this is shaping up to be a perilous time for the economy, in which bad luck or bad policy could easily create a major slowdown or recession. And that’s the case no matter how strong things look at the end of 2018, or how long it’s taken markets to reckon with that reality.
Commentary: This is a strong, detailed conclusion clarifying that the author has no idea what is going to happen.
Translation: This prediction thing is tricky. But it sure looks hinky. Unless things go well. And the Fed will raise rates, which might cause a problem. Because that’s what they do. So keep investing. Or don’t. Completely up to you.
What will actually happen
There is no reason to listen to me over anyone else. My predictions are much less informed than economists’ or, for that matter, financial journalists writing for The Upshot. But unlike journalists, I am an ex-analyst used to making unequivocal predictions, and being wrong from time to time, too.
I think the tax cut has put the economy in a sugar high and juiced the stock market with stock buybacks. This may be good for stocks right now, but it’s the opposite of a growth signal, because companies believe their money is better spent on their own stock than on investing in the future.
I think that trade wars, a president under investigation, a divided government half of which wants to impeach him, and a lack of steady hands on the tiller of the nation with the largest economy in the world are risk signals. The likelihood of bad things derailing the economic growth is high. Recovery from such problems requires facing economic facts squarely and building consensus for action. These are not qualities of our current leadership.
I think a trillion and half dollars of student debt and a demoralized class of young people are going to undermine the traditional sources of growth and innovation in the economy.
I think ignoring — and worsening — a $21.6 trillion national debt will come back to bite us. China, which owns a lot of that debt, will hold it over us. The debt will hamstring our ability to respond to crises. It will demand printing money. Inflation is going to get here eventually.
I think global warming is a long-term disaster looming. That’s not good for anyone, companies included, except maybe Servicemaster.
None of this is good news, regardless of whether the Fed raises rates a few times in 2019 or not.
But despite this, I am an optimist, because I believe — and fervently hope — that our nation has the structure and resources to recover.
Even so, you should definitely buckle your seat belts. It’s going to be rough ride for a decade or so.