The U.S. Congressional Budget Office Forecasts Growth Recession As From Late 2018, Then GDP Falls Further In 2019, Bottoms In 2020
Summary
- The CBO forecasts imply that real GDP will lift further into late-2018 but then falls into 2019 and bottoms in 2020. That's the next growth recession waiting in the wings.
- One reason: by end of 2018, private tax relief clauses expire. Suddenly, tax rates rise and extract billions of dollars out of the economy. And fiscal policy won't provide redress.
- Why? Fiscal discretionary spending will also fall precipitously starting late 2018 until 2020. When one extracts dollars from an economy, it has to shrink by that amount.
- The rest of the 2018 year is still good time to invest in risk assets - we may be looking at this period with fond memories during the 2019-2020 period.
We have been working on this thread for some time, as part of our long-term "scan" of systemic liquidity - the very long-term variety. That's why I was extremely delighted to see that my friend, SA Contributor Alan Longbon has worked up the details of the next recession - and possibly the one after that. All of these from the current forecasts of the US Congressional Budget Office. He laid out in detail the dynamics that could lead to a sharp growth slowdown as from late 2018 to 2020. See Alan's work here.
We have been using the chart below to obtain a general view of the next growth crunch - and indeed, a likely top in GDP growth this year may possibly morph into a recession until 2020. We are still working out the details (looking at other long-term variables) if GDP growth (AR) falls below zero in 2020, or not. But I believe we could see it coming close to zero, at the very least.
These details dovetail with the dynamics that Alan had described in his SA article.
CBO Forecast of Gov't Outlays, Potential, Actual GDP (Real), GDP
Here is a zoomed view:
CBO Forecast of Gov't Outlays, Potential, Actual GDP (Real), GDP
What is especially relevant and telling in our opinion is the sharp decline in fiscal discretionary spending from late 2018 to 2020 (brown line, see graph above). It resonates with us because the changes in this data lead the changes in GDP and the changes in risk asset prices. The sharp fall in fiscal discretionary spending after 2018, along with the expiration of tax relief by late 2018, could lead to growth recession in 2019-2020. That could bring down the price of risk assets (see graph below).
Nonetheless, the rest of the 2018 year is still a good time to invest in risk assets - we may be looking at this period with fond memories during the 2019-2020 blah period. Take advantage of the run up into the end of 2018 when the tax exemptions are at their maximum. But do not overstay - take profits late in the year. We will discuss these issues again when it is time to exit the markets. The economy is also at risk if the Fed follows through on its rate hike regime of two, possibly three more, this year. I discussed that here.
A monetary policy tightening in the entirety of 2018, and fiscal consolidation by late 2018, extending into 2019-2020, are scary prospects, as they would be happening at the same time. The withdrawal of systemic liquidity from those policy actions will have adverse consequences on risk assets. Nonetheless, there is still time to benefit from the recent upwelling of growth worldwide as the spillover effects would still flow into risk assets over the next 2 quarters.
Why are we telling this to you now? It is because we will have an opportunity to reengage the stock markets shortly. The troughs made during the coming days could be the lows until late in the year. When we summarize the services rendered to subscribers of the PAM service at the end of 2018, we would like to be able to say that we helped them pick the bottom of the market in May 2018.
This article was written by
Robert P. Balan runs Predictive Analytic Models, #1-rated trading unit at Seeking Alpha. PAM trades Swiss HF funds using Federal Reserve, US Treasury, and term (money) market liquidity data flows as basis for trading decisions. He is domiciled in Zurich, Switzerland.
Robert Balan has 5 decades of experience in the financial markets. Education in Mining Engineering, Computer Science & Engineering, M.S in Quantitative Finance, and training in Economics led to a commodity analysis career during the commodity boom of the early 1970s. Robert made a switch to global macro focus in the early 1980 when the commodity bull market waned, with specialization in foreign exchange. Robert wrote a very high profile daily FX analysis while Geneva-based (Lloyds Bank Int'l) in the mid-1980s (the first FX commentary with a real global readership, "most accessed" in the Reuters and Telerate networks from 1988 to 1994).
He worked for Swiss Bank Corp and Union Bank of Switzerland (precursors of today's new UBS) as head of technical research in various finance centers (London, New York, and subsequently, head of prop trading at SBC in Toronto ) from the late 1980s to mid-1990s. A stint at Bank of America as head of global technical research followed in late 1990s to the early 2000s.
Robert returned to Switzerland in 2004 as head of technical research and strategy, and FX market analyst for Swiss Life Asset Management in Zurich. Robert wrote FX analysis and capital markets commentary for Saxo Bank (Denmark) in the early 2000s. He joined Diapason Commodities Management (CH) in Lausanne in 2008 as senior market strategist, and subsequently Chief Market Strategist, utilizing fundamental macroeconomic drivers and structural/technical data in modeling asset price and sector movements.
Robert wrote a book on the Elliott Wave Principle in 1988, which has been hailed by the London Society of Technical Analysts as best ever book written on the subject. Robert is a member of the National Association for Business Economics (NABE), U.S.A.
Analyst’s Disclosure: I am/we are long U:EOG, U:CLR, U:XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The PAM portfolio is long Gold, and short US Dollars. We intend to go long Equities over the next few days. We are also looking for good levels to short the XME ETF.
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