The economy is on the brink of a record: The longest expansion ever, a milestone the US will hit in July. Ten years with no recession. Can if keep going or is a downturn near?
There’s cause for concern, but not alarm. That’s our judgment after conversations with economists and business people, plus studies of the latest economic data. Recent drops in stocks, Treasury yields and commodity prices are worrisome for the economic outlook but don’t raise red flags yet. Growth this year still looks OK at 2.5%. Next year is the worry. Even if all goes well in 2020, GDP growth will still come in under 2%. But it wouldn’t take much to drop that to about 1%.
All that aside, there is still a lot that is going right with the economy: Ultralow unemployment…the lowest in 50 years. More folks are working, earning a paycheck and spending relatively freely, which is key for the economy. Solid business confidence, except for manufacturers. Most small firms still feel good about their prospects and want to expand, if they can find the workers. Low inflation and, by extension, reduced interest rates. The Federal Reserve can afford to cut rates a bit to support the economy, since inflation is fairly benign. The bottom line: The economy is slowing, but gradually, not nose-diving. Plan for slower growth. Be alert to the risks ahead. But don’t overreact, either.
On the upside, interest rates aren’t a worry the way they were at the start of the year. Back then, it looked as if the Federal Reserve would keep hiking. Now, the Fed is likely to dial back interest rates a bit. Even in a sideways or down market, there are ways to make money. The key is to be selective, seeking stocks and sectors that can thrive as the economy slows
The Trump administration wants to privatize Fannie Mae and Freddie Mac, the quasi-governmental firms that dominate the secondary mortgage market. The new head of the Federal Housing Finance Agency, which oversees the two lenders, wants to ease them out of conservatorship in early 2020. The government took control at the peak of the mortgage crisis when the firms couldn’t cover their subprime losses. Because of their federal charters, investors assumed Washington backstopped them, which is why FHFA wants to give Uncle Sam a smaller role in mortgage financing. First, they need capital, either from an IPO or by keeping their profits… under conservatorship, all Fannie and Freddie profits go into the federal treasury. FHFA is mulling those and other funding options to help privatize the lenders.
In the latest week, total mortgage application volume jumped nearly 27%. And Core Logic is reporting that the US foreclosure rate is the lowest it has been in 20 years. Americans confidence in housing continues to rise and mortgage rates continue to trend lower.
Kiplinger Letter, June 2019