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The Elbert Files: The economy moves on

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The current economic recovery will be 10 years old in June, tying the dot-com expansion from March 1991 to March 2001 for the longest period of consistent U.S. growth since the end of the 1930s’ Great Depression.

Many experts never thought the growth would last this long. And many more think it won’t last much longer.

In fact, for much of the past 10 years, economists and politicians have berated the expansion that began in June 2009 as one of the least impressive periods of economic growth in memory.

Instead of growing at 4% or better, as often happened during economic recoveries of the latter half of the 20th century, the post-2009 economy was stuck in second gear with gross domestic product growth of between 1.6% and 2.6% for many of those years. Only in 2015 and 2018 did it bump up to 2.9%.
If you follow the economic news, you know there is no shortage of prognosticators predicting that the next economic downturn is right around the corner, or that it may have already begun.

But the truth is that, despite market fluctuations, the next downturn has not started and is probably not in the cards anytime in the immediate future.
Economist James Paulsen, who writes institutional research for the Leuthold Group in Minneapolis, has written several newsletters in the past month refuting “Chicken Little” predictions of a collapsing economy.

One appeared on March 22, which was a day the Dow Jones index lost 460 points. Paulsen’s article was titled “U.S. economic momentum indicator points to NO recession?!?”

“On the day when the yield curve has inverted, spiking recession fears and causing the market to plummet,” Paulsen wrote, “it may be useful to update” a forecasting tool known as the Citigroup U.S. Economic Surprise Index.

Suffice it to say the forecasting gauge did not predict an imminent recession. In fact, nearly a month later, as I write this column, the Dow Jones index is about 500 points higher than it was on March 21, the day before it lost 460 points.

The yield curve inversion, which Paulsen discussed again one week later, describes the relationship between long-term and short-term interest rates.
Normally, long-term rates are higher. When short-term rates are higher, it can be a sign that investors lack long-term confidence in the economy, which typically means a recession is looming.

But other factors can also influence the relationship between long-term and short-term rates, as Paulsen suggested in a follow-up newsletter titled “Has the yield curve been Trumped?”
It’s possible, he said, that the strong fiscal stimulus of the 2017 tax bill, along with other deficit-building policies of the Trump administration, could affect the normal relationship between the yield curve and recessions.

In a separate newsletter, Paulsen noted, “While large public deficits may have long-term negative implications, in the intermediate term, fiscal juice has generally been friendly to investors.”

That may be what is happening this year, he suggested.

An indicator called the “Boom/Bust Indicator,” which is based on commodity prices and unemployment claims, suggests there is still some steam in the current expansion and “the fundamental foundation forming under this stock market may be better than most appreciate.”

Paulsen went on to raise the question of whether “the stock market surge may not be as foolhardy as it at first appears.”

But while that sounds like good news for now, he included this caveat: “Longer-term imprudent management of the U.S. budget may produce undesirable outcomes for the economy and for an economic expansion this old. Moreover, the historical relationship between fiscal juice and future stock and bond returns is only one factor that investors should consider.”