American Economic Story Can be Read Only Against a Global Background

The Effect of House Prices on Macroeconomics
December 17, 2019
California Association of Realtors monthly data for the San Francisco Bay Area
December 18, 2019
The risk of a recession that had been hovering over the American economy as recently as a couple of months ago seems to have paled down. Economic models predicting a 50% chance of the USA slipping into recession (back in August) have moderated their stance. Goldman Sachs and Morgan Stanley put it in the 20% to 25% slot now. Barclay gives it an even more modest 10% chance. And why not? Economic indicators of recession have only flattered to deceive. They haven’t posed a continued threat in any way.
  • The Jobs market is doing decently.
  • Consumer spending doesn’t reflect a consumer sentiment glut either.
  • The stock market is buoyant.
  • Depressing end-summer cues from the bond market have reversed (from red to yellow).
Inverted yield curve When the yield curve inverted in late August, recession prophets came marching up to our throats. They had history on their side. Every US recession was preceded by an inverted bond yield curve. What it meant was that the short-term bonds invited higher interest rates than the long-term bonds. In a normal scenario, investors expect a higher yield with long term bonds because the extra income offsets the risk of locking money for long (remember, they are largely putting their trust in the US Treasury, which despite its great show of power is evidently under a debt mountain). When the yield curve inverts, it sends the wrong feelers. It just means that investors don’t mind paltry returns on long-term investments (which is just the opposite of how it should be) because they are eager to save for the future, threatened by the economic uncertainty of the present. The situation is better now. Paltry global growth cues- ‘slowbalization’ Yes, there is inarguably a streak of economic uncertainty pasted on our lives. IMF predicts a 3% growth for the global economy, as against 3.6% it had foreseen for 2018, and 3.8% it had predicted for 2017. It has got a lot to do with the strengthening US dollar. As all transactions occur in the US dollars, countries find it difficult to service their debt when the US dollar appreciates, foreign suppliers feel shortchanged, and the US feels more threatened about global payment defaults. As an aside, I think an ever-strengthening US dollar will make imports cheaper to a point where it hits domestic manufacturers really hard. But I am sure that monetary policies will juggle interest rates accordingly. Apart from the rising US dollar, the ‘Slowbalization’ has also become more pronounced because of a fall in manufacturing levels, protectionist tariffs, paltry trade policies (exposed even more due to the shaky financial atmosphere today), and of course, Brexit (and its repercussions for the EU) and the fallout of the US-China Trade war. Phase One Trade deal is no panacea We hear with cautious optimism that Phase One of the trade deal between these two global giants will be a game-changer. But let’s not fool ourselves. The deal won’t change things overnight (especially because the Chinese economy that had been doing plenty of spadework for us up until now is set to have a fairly average next decade- nothing close to the miraculous growth of the last two decades). The ramifications of the present global glut need sweeping global stimuli to be warded off. This Halloween, we didn’t only have to ward off the spirits, one presumes.

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