2017

December 2017

As we enter 2018, consumer and business optimism is at levels not experienced since the dot com days of the late 1990s. Passage of “The Tax Cuts and Jobs Act” by Congress and signed by President Trump just before Christmas has reinforced animal spirits. 2018 should be a good year, perhaps a very good year. But, with the economy operating at full capacity and the labor market extremely tight, Bill Longbrake warns that the extra stimulus risks overheating the economy and exacerbating imbalances that have already been building. In this month’s letter, Longbrake examines the natural rate of unemployment and demonstrates that small differences in its level have significant implications for inflation and monetary policy. He also provides updates on economic activity, employment, inflation and interest rates.

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November 2017

As prospects rise for significant tax reform legislation to be enacted and take effect at the beginning of 2018, this stimulus boost is likely to extend the current expansion and push off the timing of the next recession. But, because the stimulus is coming during the mature phase of the cycle when the economy is already at full employment, it raises the risks of overheating and a potentially tighter monetary policy down the road. Amplifying the business cycle at this point in time is not optimal economic policy. But it is politically necessary for Republicans to deliver at least part of what they have promised to the American public. Bill Longbrake discusses prospects and risks in this month’s letter. He also describes significant policy developments coming out of the 19th Communist Party Congress that will shape China’s social and economic systems for years to come.

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October 2017

Investor, business and consumer optimism has not been fazed in the least by a multiplicity of mega disasters and political drama in Washington, D.C. Stocks reach new highs nearly daily; price volatility is a distant memory; interest rates refuse to rise; credit spreads are tight and getting tighter; inflation is wilting. In this month’s letter, Bill Longbrake observes that we have seen this movie before – indeed many times. When optimism prevails and there is ample liquidity, financial markets turn giddy. Times, such as the one the global economy finds itself in currently, occur when the economic cycle is mature. They are fueled by copious amounts of liquidity curtesy of central banks. For a while, sometimes for a very long while, these goldilocks moments go on and on sustained by optimism-driven positive feedbacks. But, ultimately, they end either in the soft landing the Fed is trying to engineer or a hard landing. Enjoy the moment but prepare for more difficult times!

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September 2017

Optimism in the domestic and global economic outlooks has ratcheted up a notch, but has not reached a euphoric level that often presages a building speculative bubble and end-of-cycle climax. Political drama in our nation’s capital and a spate of global and domestic natural disasters have not dampened optimism. Economic activity is grinding higher ever so slowly. Risks, which always lurk beneath the surface and which have a nasty habit of surprising markets, are slumbering. Eventually, a correction, or more likely a recession, will occur. Bill Longbrake observes that predicting timing is always difficult as the good times always seem to go on a lot longer than expected. In the absence of flagrant speculation-driven bubbles, there is good reason to expect favorable economic conditions to prevail for the next several quarters.

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July-August 2017

Summers are customarily a time to go on holiday, spend time with family and friends and recharge one’s “batteries” in preparation for the onslaught of fall duties and obligations. Except for “fire and fury” comments about North Korea, the dog days of August are upon us. No financial markets crisis of any sort appears imminent. That could change when Labor Day passes and market participants put aside the mellow days of summer and take a harder look at economic and market prospects. So, in the absence of any significant economic developments and the likelihood that economic challenges and financial markets volatility is a long ways off, this summer’s July/August combined Longbrake Letter focuses on recent data reports and revisions in previously reported data. For now, the economy and markets are advancing slowly and methodically.

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June 2017

In this month’s Letter, Bill Longbrake discusses whether the FED’s monetary policy intentions might turn out to be a major mistake that propels the U.S. economy into a premature recession. Based on employment, the U.S. economy is already operating at full capacity. But inflation remains well below the Fed’s target of 2% and has declined over the past three months. The Fed expects to raise short-term interest rates from a range of 1.00-1.25% to 2.75-3.00% over the next two years. However, the market disagrees and only believes rates should be raised to a range of 1.50-1.75%. If the market is right, the FED may be on a policy course with disastrous consequences. There is good reason to be concerned in light of imbalances in the U.S. economy unleashed by the Fed’s unprecedented and extended multi-year manipulation of interest rates to reflate the economy. Bill also discusses other risks (yellow flags) facing the U.S. economy and pending developments in health care legislation and fiscal policy, as well as providing updates on a variety of other economic developments.

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May 2017

Good times prevail. In spite of the incessant noise coming from our nation’s capital, financial markets appear to be unphased, as stocks ascend to new heights almost daily. The current U.S. economic expansion has reached eight years. It is the third longest on record and in 18 months will capture the all-time longevity title. Although the expansion is mature and some “yellow flags” are emerging, there is a reasonably good chance that the record will be broken. In this month’s letter, Bill Longbrake provides updates on GDP and its components, employment, inflation, productivity, and interest rates.

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April 2017

Expansion of economic activity in the U.S. began nearly eight years ago in July 2009. Expansions do not die simply of old age. They turn into recessions when the economy overheats. Markets usually tend to be myopic and underestimate the presence of recession-inducing excesses and, thus, are surprised when a recession occurs. Today, there does not appear to be any single highly visible imbalance to interrupt the steady upward march of economic activity. However, when the economy is operating at full employment and the Federal Reserve is engaged in tightening monetary policy, risks inevitably build. In this month’s letter, Bill Longbrake examines risks – “yellow flags” – which, in addition to tightening monetary policy, are present in the U.S. economy and deserve attention and monitoring.

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March 2017

Optimism and hope continue to reign that the U.S. economy will strengthen, but some doubts are beginning to surface. Hard economic data have been mixed. Political turbulence and daily drama in Washington may delay or sidetrack tax reform and infrastructure spending. In this month’s letter, Bill Longbrake examines the long-term potential rate of real GDP growth and explains why the lackluster 1.7 to 2.0 percent annual growth expectation may turn out to be overly optimistic. He also discusses why the labor market might not be as tight as most believe, why inflation might not reach the Fed’s 2 percent target, and why annual wage growth may top out at less than 3.35 percent. In Bill’s discussion of monetary policy, he muses about whether the Fed is “behind” or “ahead of the curve,” and explains possible approaches to reducing the Fed’s bloated balance sheet.

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February 2017

Financial markets just about everywhere are doing well as global growth accelerates. But, while investors are enjoying rising prices, many are worrying about where the U.S. is headed politically under a divisive Trump Administration and about the potential for political crisis in Europe given the rise of populist and nationalist movements and the spate of national elections on tap for this year. In this month’s letter, Bill Longbrake summarizes serious issues that are bubbling beneath the surface. He also examines the forces that led to the election of Donald Trump and muses whether Trump’s personality and illiberal tendencies might derail needed reforms to reverse the economic and social decline in America which has been gaining momentum in recent years.

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January 2017

In this month’s letter, Bill Longbrake discusses the recent surge in business, consumer and investor optimism following the election of Donald Trump as the U.S.’s 45th president and assesses the 2017 outlook. He raises the question of whether the policies of the incoming Trump Administration and the Republican-controlled Congress, combined with political and economic developments elsewhere in the world, will lead to continued slow and steady growth in the U.S., or whether growth will accelerate, or perhaps recession might occur. All are possible outcomes in coming months. Based on past experience there is a good chance that bullish expectations will not be fully realized. In addition, some of Trump’s potential trade and tax reform policies could have significant and unpredictable adverse global consequences. Given the considerable uncertainty, prudence argues for being prepared to manage through any and all possible outcomes.

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Robert H. Smith School of Business
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University of Maryland
Robert H. Smith School of Business
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