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MACROECONOMIC OUTLOOKPUBLISHED MAY 9, 2019 | ERIC BASMAJIAN | FATRADER.COM
MACROECONOMIC FRAMEWORK
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Secular
Economic
Trends
Business Cycle
Trends
Short-Term
Growth Cycle
Trends
10+ Year
Trends
6-10 Year
Trends
12-36
Month
Trends
SECULAR DECLINE IN NOMINAL GDP GROWTH
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Nominal GDP growth
(growth + inflation)
has been in a secular
decline since 1980.
This decline is due to
debt, demographics
and productivity
growth.
REAL GROWTH + INFLATION
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Nominal growth,
headline inflation, and
real GDP growth are
all in secular decline
POPULATION GROWTH & PRODUCTIVITY GROWTH
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The product of
population growth and
productivity growth
comprise long-run
trend GDP growth.
POPULATION GROWTH PROJECTION
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US population growth
is projected to decline
through 2060.
A continued decline in
population growth will
drag GDP growth
lower over time.
LOWER GROWTH WILL BRING LOWER INTEREST RATES
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Over the long run,
interest rates follow
the trends in nominal
GDP growth.
As is the case in
Europe and Japan, a
continued decline in
growth will push
interest rates towards
the zero bound.
MACROECONOMIC FRAMEWORK
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Secular
Economic
Trends
Business Cycle
Trends
Short-Term
Growth Cycle
Trends
10+ Year
Trends
6-10 Year
Trends
12-36
Month
Trends
BUSINESS CYCLE TRENDS
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• Housing
• Durable Goods
• Automobiles
Housing, durable
goods and auto sales
are all big-ticket items
in the consumer
basket, are sensitive to
changes in interest
rates and subject to
the economic concept
of pent-up demand.
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BUSINESS CYCLE TRENDS
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This is the third
slowdown of this
economic cycle.
The Business Cycle
Index has not
registered a sustained
negative growth rate
which would be a
major red flag in
terms of business
cycle risk.
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MACROECONOMIC FRAMEWORK
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Secular
Economic
Trends
Business Cycle
Trends
Short-Term
Growth Cycle
Trends
10+ Year
Trends
6-10 Year
Trends
12-36
Month
Trends
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GROWTH RATE CYCLE TRENDS
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• Employment
• Industrial Production
• Personal Income
• Consumption
As the secular trends
illustrated, growth has
been trending lower.
Within the business
cycle, growth goes
through periods of
acceleration and
deceleration.
We are currently in a
period of deceleration.
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GROWTH RATE CYCLE TRENDS
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The US experienced a
sharp deceleration in
growth in 2015-2016
that nearly resulted in
a recession.
Today, growth, based
on the coincident
index, has
decelerated form
2.75% to 1.87%.
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GROWTH RATE CYCLE TRENDS
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The Treasury market
follows the rate of
change in
growth/inflation.
The bond market can
often lead.
This is a coincident
index, but we have
leading indexes that
predict moves in the
coincident index.
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WHERE ARE WE TODAY?
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Secular economic trends
point towards a long run
decline in US economic
growth prospects.
Business cycle trends
have flattened as pent-up
demand is exhausted.
After a boost from
government spending
and tax cuts, US
economic growth is
decelerating
Secular Trends ↓
Business Cycle Trends →
Growth Rate Cycle Trends ↓
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ARE WE CLOSE TO A RECESSION? YES & NO.
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Economic growth has not
slowed sufficiently to put
the economy at risk of
recession, but it is getting
close.
Should the coincident
index continue to move
lower, sub 1.5%, the
economy becomes
vulnerable to a shock.
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ARE WE CLOSE TO A RECESSION? YES & NO.
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Economic growth has not
slowed sufficiently to put
the economy at risk of
recession, but it is getting
close.
Should the coincident
index continue to move
lower, sub 1.5%, the
economy becomes
vulnerable to a shock.
Secular Trends ↓ +
Business Cycle Trends ↓
+ Growth Rate Cycle
Trends ↓ (Below 1.5%) +
Shock = Recession
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WHY IS LOW GROWTH A PROBLEM?
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Eventually, a secular
decline in trend growth
becomes problematic.
For now, not many are
worried about 2% trend
growth.
Next cycle, if trend
growth moves below
1.5%, as is the case in
Japan, the economy
becomes perpetually
vulnerable to shocks and
recessions become
frequent.
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MY FOCUS IS ON INTEREST RATES
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• I prefer to overweight risk when risk assets
have performed in line or underperformed
economic growth, coupled with accelerating
business cycle trends and accelerating
growth rate cycle trends.
• I believe the highest probability bet in this
environment is for a continued decline in
interest rates.
CLOSING THOUGHTS
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• Secular economic trends will continue to move lower over time
• The economy is not vulnerable to a recession quite yet, but a continued
decline in economic growth will make the economy vulnerable to a
shock
• I am not betting against US stocks, but when economic growth is
decelerating, the risk of corrections increases (NYSE Composite has
not made a new high since January 2018)
• Over the next 12-36 months, my shortest timeframe, I believe we will
see lower, not higher interest rates.
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