Longbrake Letter

November 2019

The recession scare of late summer now seems like a bad dream – out of touch with reality. Market participants are ebullient. The U.S. economic expansion, now the longest in history, rolls on with no apparent end in sight. When sentiment is upbeat, risks are underestimated and bad news is ignored. We owe the current era of optimism to the retreat and perceived containment of several significant risks. But the forces that made these risks so threatening remain in place. In the United States, it is clear from the march of data reports that growth is slowing and overheating risk has diminished. A benign soft landing would be welcome indeed. But the excesses and imbalances in the U.S. and global economies remain in place and largely unaddressed. Read more »

October 2019

Global growth continues to slow and the U.S. manufacturing sector is in recession. However, events unfolded in September and early October that reduced downside risks and the perceived threat of imminent U.S. and global recession. The U.K. may be on the verge of an orderly exit from the European Union (EU), which would reduce economic risks for both. An EU-friendly government took power in Italy, removing for now an existential threat to the EU. China and the United States backed off belligerent rhetoric. President Trump announced a Phase 1 trade deal and suspended implementation of tariffs scheduled for Oct. 15, although the “deal” appears to lack real substance. The European Central Bank approved aggressive monetary easing policies intended to boost EU economic activity. And, the U.S. Federal Open Market Committee on Sept. 18 cut the federal funds rate for a second time and on Oct. 11 announced plans to increase bank reserves substantially. While near-term risks have diminished, long-term risks remain and continue to build. Read more »

September 2019

Several global risks escalated in August and fears of recession surged. But events have unfolded in September that have reduced the perceived threat of imminent recession. The U.K. parliament passed a law requiring Prime Minister Boris Johnson to seek an extension in the Brexit negotiations. Italy cobbled together a new EU-friendly government. China and the U.S. backed off belligerent trade rhetoric; President Trump delayed implementation of the most recent round of tariffs until Oct. 15; and both countries agreed to resume discussions. The European Central Bank approved aggressive monetary easing policies. And, the U.S. Federal Open Market Committee (FOMC) is expected to cut the federal funds rate for a second time at its meeting on Sept. 18. While recession anxiety has abated, the possibility of recession in coming months remains. In this month’s 2019 Outlook Assessment, Maryland Smith's Bill Longbrake shows in charts and tables the consequences of a U.S. recession. Read more »

August 2019

More Volatility, and the Prospects of Zero Interest Rates
The dog days of August have been punctuated by renewed volatility in global financial markets as investors worry about slowing growth in China; recessions in Japan, Germany and Italy; and escalation in the U.S.-China trade war. Concerns about recession in the U.S. have resurfaced and policymakers are scrambling. The risks to U.S. and global growth, described in the Longbrake letter at the start of this year, remain. Some have worsened considerably. Will monetary policy come to the rescue once again? In this month’s letter, Maryland Smith's Bill Longbrake explains why long-term interest rates in the U.S. could be headed to zero in coming months – contrary to the expectations of most prognosticators. Read more »

July 2019

Economic activity continues to slow, both in the United States and globally. Japan and Europe are on the cusp of recession; China’s has slowed meaningfully. Aggressively accommodative monetary policy in the United Staes is driving interest rates down and stock prices up. Look for a cut in the federal funds rate on July 31 with more cuts probably to follow later in the year. Policy can extend an economic expansion for a very long time by supporting investor, consumer and business confidence. But, by itself, monetary policy cannot fix economic imbalances and, in fact, could exacerbate them. The day of reckoning will come, but it is not yet at hand. Read more »

June 2019

As we approach the summer months, business and consumer optimism remains at a high level achieved only at previous cyclical peaks in economic activity. Investor sentiment, however, was dampened by the collapse of the U.S.-China trade negotiations in early May and concern about slowing U.S. and global growth. Stock prices fell initially, but then recovered partially in early June as investors became convinced that the Fed would cut interest rates. If the Fed cuts rates as expected, it will sustain good times for a while longer. However, significant risks are not being addressed, so it is only a matter of time until recession engulfs world economies. Read more »

May 2019

May brought the failure of the U.S.-China trade negotiations and the resumption of tit-for-tat tariffs. During March and April, there were signs in the United States and globally that the Fed’s easier monetary policy, Chinese stimulus, and improved consumer, business and investor sentiment had arrested some otherwise slowing economic activity. Continuation of this favorable trend is now at risk. Easy monetary policy, copious amounts of liquidity and government stimulus can boost optimism and sustain economic expansions. But such policy tools rarely solve fundamental economic imbalances and can have perverse effects by creating asset price bubbles. Risks to the U.S. and global economies remain elevated and have even notched up a bit. Read more »

April 2019

The gloomy mood at the beginning of 2019 has given way to renewed optimism that economic activity in the United States and around the world will improve as 2019 progresses. This sentiment shift can be traced to easing of U.S. monetary policy, easier financial conditions and Chinese policy stimulus. However, economic activity continues to deteriorate in Europe and Japan. Significant risks persist, but the probability of recession in the next few months has diminished. Read more »

March 2019

In his March assessment of the U.S. and global economic outlook for 2019, Maryland Smith's Bill Longbrake observes that U.S. monetary policy easing has reduced the threat of an imminent U.S. recession. However, significant risks remain. Growth continues to slow across the globe with recession risks rising in Europe and Japan. Most expect policy intervention to reverse China’s growth slowdown in coming months, which, if successful, (and that's far from certain), would bolster global economic activity. Read the assessment »

In the March Longbrake Letter, Bill Longbrake updates the discussion of U.S. and global risks that could precipitate recession. While he maintains a “recession watch,” he cautions that the timing of onset is uncertain and it remains possible that policymakers will be able to manage risks and engineer an extended economic expansion in the U.S. Longbrake also examines recent developments in consumer spending, business investment, housing, employment and monetary policy in the March letter. Read the letter »

February 2019

In February’s update to the 2019 outlook, Bill Longbrake describes expected economic outcomes for the U.S. and global economies during 2019 and developments during the first six weeks of the year. He also summarizes risks to the outlook, most of which are negative, although monetary policy risk in the U.S. has moderated. While most analysts expect another good year, but somewhat slower growth, recession risks remain significant. Read more »

January 2019

In January’s economic commentary, Bill Longbrake places the U.S. economy on recession watch. Conditions are developing that could lead to recession in the next few months, but those conditions could evolve in ways that keep the U.S. economy on firm footing for a long time to come. Bill examines those risks. He then shows simulations of what could happen to key economic measures, if a recession occurred starting in the fourth quarter. Read the letter »

As was the case in 2018, above-potential economic growth continues to be a global theme. However, reflecting growth deceleration in the second half of 2018, over the course of 2019, global growth is expected to slow gradually and converge to its long-run potential level by the end of the year. Read the letter »

Above potential economic growth continues to be a global theme as global and world economies benefited during 2018 from years of easy monetary policy. Practically all economies grew above potential. However, as 2018 came to a close, global growth momentum decelerated. The slowdown was particularly notable in Europe, China, and emerging economies, particularly those dependent on exporting commodities. Read the assessment »