No Recession On The Horizon

The market frequently goes from periods of exuberance, ignoring any bad news and just focusing on the positives, to periods of anxiety, focusing only on the negatives. Right now, we are in a period where the stock market is obsessed with negatives, such as a potential trade war, a “hard” Brexit (the UK leaving the EU without a deal), a slowdown in housing in the US, a feeling that the US economic recovery has gone very long and will end soon, a fear the Federal Reserve may raise interest rates “too far.” The  list could go on. I’ve written about some of these topics before. In this newsletter, I want to focus on two things – the length of the current economic recovery and my outlook for the economy.

The US economy is like a three legged stool. (Countries that have substantial exports would have a fourth leg to their economic stool.) The economy is made up of three “legs”: consumer spending, government spending, and business investment. Each leg supports economic growth. Weakness in one area, or leg, can be balanced out by strength in another.

Consumer Spending

Consumer spending is the largest portion of the economy and makes up about 70% of economic growth. Included in this 70% number are pass-through government programs, such as Social Security, Medicare, Medicaid, CHIP, and so forth. These programs either give money directly to consumers (e.g. Social Security) or to service providers (e.g. Medicare payments to hospitals and doctors).

Right now, this area of the economy looks pretty good. Jobs have been steadily growing since the recession, and wages are starting to grow a bit as well. Additionally, Social Security is set to have one of its first inflation increases in several years. All of this means more money in the pockets of consumers.

There is one area of weakness: housing. Changes to real estate tax deduction rules along with rising interest rates have slowed housing growth. It’s important to keep in mind, however, that housing now represents a much smaller part of the economy than it once did. At the height of the housing bubble, residential investment accounted for almost 7% of the economy. Today, as you can see in the graph below, it’s just below 4%.

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