Common Cents & Boring Things

February 7, 2020, by John Norris

“I Like Boring Things”

Andy Warhol

Long years ago, I was in a group conversation which ultimately led to the following question: “if you could only eat one thing for the rest of your life, what would it be?” While I don’t remember all the answers, I do recall a couple of folks saying filet mignon and twice-baked potatoes. Someone else said lobster with drawn butter, and there was at least one response for Italian food of some variety. Me? Mr. Excitement here said: “I would probably go for roasted chicken, steamed broccoli, rice, and a dessert of sliced apples and almonds.”

While incredulous is a strong word, folks were a little surprised by my answer. Was that really my favorite meal? I would really want THAT for the rest of my life? The answer is/was quite simple: no, roasted chicken and broccoli is NOT my favorite meal, nowhere near it. However, if I had to have ONE meal, and only one meal, for the rest of my life, this one covers most of the bases, and I would probably never get completely sick of it. How could I? It is so boring…so straight down the middle.

Not surprisingly, the rest of the group called ME boring, and I suppose I am. Now, if I had to have one LAST meal, it would be a bucket of fried chicken and a bag of Cheetos. However, can you imagine eating THAT for every meal for the rest of your life? I suppose the upshot of that would be you wouldn’t live terribly long with that kind of diet.

This has a point. Sometimes boring is better.

Yesterday (2/6/20), Bloomberg columnist Noah Smith wrote what I consider to be one of the better economic op-eds in recent memory. In his column entitled “The Economic Expansion Just Keeps Going,” Smith wrote the flowing non-sequential passages:

“The U.S. economy’s steady growth — the longest stretch since World War II without a recession — is something of a mystery. Last summer, the yield curve inverted, which traditionally is the most reliable signal of an impending downturn. There were all sorts of plausible reasons the economy could take a turn for the worse — a mountain of increasingly risky corporate debt, a slowdown in China, President Donald Trump’s trade war, manufacturing weakness, increasing uncertainty about government policy and so on.

Yet no recession has appeared. Gross domestic product growth has been remarkably steady at a little more than 2% — probably the best, on average, that can be hoped for given the aging population and the global productivity slowdown.

And the labor market is stronger than at any time except the late 1990s, with workers at the bottom of the income scale getting real wage increases…

The truth is, there’s no obvious driver of U.S. growth. The most likely explanation is that the economy is simply in a phase of boring normality.

Most people tend to think of the business cycle as a series of alternating booms and busts. The U.S. economic record seems to confirm this, with recessions coming at least once a decade. But while this is certainly possible, most macroeconomic models envision the economy as a production machine that just keeps chugging until some sort of shock disturbs it from equilibrium.

Since the end of World War II, there have been three main types of shocks that have thrown the U.S. economy off kilter: financial bubbles and crashes, Federal Reserve interest rate hikes or big increases in oil prices. None of these are threatening now. The rise in risky leveraged lending doesn’t seem big enough to cause another financial crisis. Vivid memories of the crash of 2008 are probably preventing excessive speculation in stocks and housing, while the Dodd-Frank financial reforms and the scars of that disaster probably are holding back financial institutions from piling up excessive risks. Meanwhile, oil prices and gasoline prices are at moderate levels, and the Fed in 2019 reversed some of the interest rate increases of prior years. Much has been made of Trump’s trade war, but so far the real impact has been minor even in sectors such as agriculture.

So, U.S. consumers simply have little reason to stop consuming. They’ve deleveraged since the crash, their homes are appreciating modestly in value, their wages are rising at a decent rate and their pensions are doing fine. Barring a new financial crisis, a major Chinese collapse, a sharp reversal of course from the Fed, or more dramatic meddling from Trump, the economy may simply keep sailing along.”

To be certain, there are a lot of questions marks out there, and Smith hits on the big ones in that last paragraph: “a new financial crisis, a major Chinese collapse, a sharp reversal of course from the Fed, or more dramatic meddling from Trump…” As I type, the low-hanging fruit or most probable culprit would be a major Chinese collapse as a result of the disruption in economic activity due to the 2019-nCoV virus. Would or will this cause a global domino effect? Could it lead to a Chinese financial system meltdown which makes its way around the world? Obviously, these are legitimate concerns.

While far from what I might consider sanguine, I am dubious China’s 1Q turmoil will lead to a sustained global economic collapse, even if it could lead to a few months of less than budgeted earnings for companies who are reliant on trade with the Middle Kingdom. Obviously, much will depend on how quickly China can halt the spread of infections. As I type, it appears as though the US economy is solid enough to withstand a short-term disruption in China.

In a decent report, Simon Macadam at research group Capital Economics wrote in a piece today:

“We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021.

The big picture is that, assuming the economic disruption comes to an end soon, the coronavirus will probably end up just delaying the global economic recovery in 2020, rather than canceling it altogether…”

This seems in concert with comments Federal Reserve Vice Chair for Supervision Randal K. Quarles made in a speech to the Money Marketeers of New York University yesterday:

“In part, the fall in investment likely reflects business concerns over the pace of global growth and risks to the outlook. In particular, 2019 was a bad year for economic growth among U.S. trading partners, and, as a consequence, our exports suffered. Recently, I have been encouraged by the progress in U.S. trade negotiations. I am hopeful that the recently signed phase-one deal with China will boost U.S. exports and lead to considerable reduction in the uncertainty that has been weighing on businesses, as will the continued progress in enacting the trade agreement with Canada and Mexico.

While the recent progress on trade should boost business confidence, the outbreak of the Wuhan coronavirus introduces a new element of uncertainty. In addition to the human toll, the virus also threatens significant economic disruption, particularly for China and its neighbors, as workers and consumers stay home and normal activities are otherwise disrupted. It is too early to say what the full economic effect of the outbreak will be, and this situation will require careful monitoring.

In summary, I remain optimistic about the outlook, but I am also highly aware that some notable risks still threaten growth, both overseas and at home.”

The rest of Quarles’ comments were, in a word, boring, and focused far more on monetary policy, its implications, and the appropriateness of the Fed’s current path than on the ‘coronavirus.’ So much so, it is or would be hard to imagine the Fed having a ‘sharp reversal of course’ outside of accommodating the financial system with cheaper money if things really ‘get bad’ in China. Seriously. As it stands, most folks are of the opinion the situation in Wuhan/Hubei is more likely to postpone economic activity as opposed to derail it. As you might imagine, the markets can tolerate the former much better than the latter.

In the end, things in the US currently look kind of boring, with GDP growth in the last 3 quarters of 2019 being: 2.1%, 2.0%, and 2.1%. Worse than that is the reports looked eerily similar. The biggest, and dare I say only, wildcard at the moment is the uncertainty around 2019-nCoV. As I wrote last week, it hasn’t been particularly lethal, yet, at around 2%, and, at roughly 32K known cases, well less infectious than this year’s outbreak of flu in the US. So, I haven’t gotten quite to panic stage yet, nor have the markets. After all, while down slightly today, US stocks are up over 3.40% for the week (as I type at 12:17 pm CDT on February 7, 2020).

As such, I will continue to be boring and I will also let you in on a little secret: I have had baked chicken and rice the last 3 nights for dinner, just to bring this piece full circle and to a close.

Have a great weekend.

John Norris

Managing Director

Chief Economist

 

The opinions expressed in this newsletter are mine and mine alone. They do not necessarily reflect the views of Oakworth Capital Bank or any of its associates, directors, and/or shareholders. I am subject to change my mind without notice, and nothing in here should be considered an offer to buy or sell financial services of any kind.