Two-thirds of business economists in the US expect a recession to start in the second half of 2020 according to the National Association for Business Economics (NABE), while a majority of respondents say President Trump's trade war is the greatest threat to the most extended bull market ever. About 10% believe the next economic downturn could begin in 2019, 56% say 2020, and 33% said 2021 or later, according to the August 28-September 17 poll of 51 economists issued by the NABE, as per Bloomberg.
41% of economists said the most significant downside risk was trade policy, followed by 18% of respondents indicating the Federal Reserve's interest rate hikes, and the same amount saying it could be a stock market repricing event or volatility shock.
"Trade issues are clearly influencing panelists’ views," David Altig, Federal Reserve Bank of Atlanta research director and NABE’s survey chair, said in a statement with the report.
Bloomberg said the economic expansion became the second-longest in May (and will become the longest on record next summer) with no significant warning signs yet and Fed officials upgrading growth forecasts for this year and next -- what could go wrong?
If the expansion continues into mid-2019, it could become the nation's longest ever, based on data from National Bureau of Economic Research figures that date back to the mid-1850s.
Despite data already showing Trump's trade aggressive tariff policies slowing global growth momentum, disrupting global supply chains, and repricing markets in some developed world but most emerging markets, economists have maintained their rosy forecasts for the US economy, as nothing in their models indicate danger.
Meanwhile, 33% of respondents said the most significant potential driver of stronger economic performance is Trump's tax cuts (increased financialization: stock buybacks, M&A, dividends, etc...), 27% cited wage increases and 10% said stronger global growth.
Overall, the economists were more pessimistic than optimistic about their assessment of potential risks to expansion, as the cycle has been overextended thanks to quantitative easing programs via the Federal Reserve and now fiscal stimulus via Trump's tax cuts.
Fed policy makers said "risks to the economic outlook appear roughly balanced" in their statement last week while raising their 2018 growth estimate to 3.1% from 2.8% in prior forecasts and 2019 to 2.5% from 2.4%. Fed officials also raised the main interest rate by +25bps to a target range of 2% to 2.25%, this year’s third hike.
"Respondents in NABE’s survey indicated they expect the Fed to raise interest rates once more this year and three times in 2019, consistent with projections from central bankers. The poll’s median estimate for the target range midpoint at year-end rose to 2.375%, equivalent to one more 25bps hike this year, from 2.21% seen in the earlier survey," said NABE.
As the storm clouds gather with the threat of a recession, the US economic expansion is becoming increasingly mature, as capacity utilization increases, above-potential growth becomes more difficult to achieve. Moreover, as the cycle matures, and monetary accommodation removed, lessening the tailwinds for the US economy. NABE's polling data shows that economists overwhelmingly understand that the next recession is approaching, and investors should now pay up for safety.
Meanwhile, all signs confirm - Goldman's protests notwithstanding- that the economy is in a "late cycle" stage, with BofA showing that the US equities versus Global equities' gap is extremely wide. The US is being priced for perfection by economists drinking the Fed's Kool-Aid.
A flattening yield curve typically reflects decreasing growth expectations and the threat of risk aversion, which tend to have an amplifying effect on volatility.
Record multiple for US stocks
Record leverage for small caps:
Market Breadth deteriorating as S&P500 races to ATHs:
What comes next?
Societe Generale thinks the peak in the US economy was in 2Q, and it will be all downhill from here, with GDP set for a sharp drop one year from now.