A top Huntington Bank economist said the U.S. remains on track to beat its longest economic expansion since World War II.
John Augustine, chief investment officer for Huntington Private Bank, presented the 2019 Huntington Economic Outlook for investors and business clients on March 26 at the Amway Grand Plaza Hotel in downtown Grand Rapids.
Augustine called his talk “Searching for a soft landing” because the Huntington economics team doesn’t expect a recession this year, but rather a temporary “troughing” — or low turning point — ahead of another climb.
According to U.S. economic trend data from FactSet, the longest post-World War II economic expansion in the nation’s history was from 1991 to 2001. If the current expansion, which began in June 2009, continues past June 30, it will set a new record.
Augustine said many economists late last year — when the stock markets were suffering — subscribed to the time-bomb theory, linking a lengthening expansion to an imminent recession. He said Australia, which hasn’t had a recession since the early ’90s, is proof the theory doesn’t hold sway.
“There’s no time limit on how long an economy can grow; there’s no expiration date on economic expansions. … But we’re going to be tested right now,” he said, referring to three top-of-mind issues for the market.
The first is The Federal Reserve going “dovish” in late March over worries of a recession by not only easing back from its plan to raise interest rates three times in 2019 but going a step further and saying it would make one 25-basis point cut to the federal funds rate this year.
The other top two market concerns Augustine cited include Europe’s economic softening and ongoing U.S.-China trade negotiations.
In support of the “soft landing” outlook, Augustine cited seven trends affecting the U.S. economy.
The first is the leading economic index (LEI), a composite of 10 indicators that has been steadily climbing since 2009 and is expected to rise yet again when March numbers are in.
Secondly, he listed five “economic building blocks”: consumer spending (up 2.19 percent), construction spending (up 0.26 percent), exports per month (up 0.06 percent), unit auto sales (down 2.3 percent) and housing starts (down 7.8 percent).
Auto sales and housing starts are of the most concern to West Michigan, he said, with Grand Rapids being a city with many auto suppliers — and also a hot housing market, where demand continues to outpace supply. He said he expects auto sales will remain stuck at about 16.5 million to 17 million units per year, and housing starts likely will climb during the spring selling season.
The U.S. Census Bureau reported hours after Augustine’s presentation that housing starts for February fell by nearly 10 percent year over year, missing estimates that had been based on favorable interest rates and rising wages.
Consumer spending and construction spending are “solid” in Grand Rapids, he said.
“Just looking out the window right here, construction looks solid. Downtown, we have a lot of projects going,” he said, referring to a skyline full of cranes.
Other trends in support of the soft landing rationale include the tight labor market, where in the past two years, the number of job openings has exceeded the number of unemployed people; The Fed’s fiscal policy; business trends, including capital expenditures and corporate profits going up while business optimism falls; and consumer trends of rising income, net worth, unemployment and mixed consumer confidence.
The seventh and final trend Augustine addressed was corporate debt, which is defined as bonds plus bank loans. Too much debt increases risk and inhibits a company’s ability to build a cash surplus.
“Corporate debt is about 46 percent of GDP. That’s the highest level it’s ever been,” Augustine said, adding that of the $20-trillion economy, more than $9 trillion is in corporate debt.
“Take a look at your corporate balance sheet. Make sure it’s where you want it to be in relation to debt because we’re going to hear a lot about it again this year, and we want to make sure it would be OK if we were wrong and the economy slowed.”
Augustine said Michigan is the 10th most populated state, with 9.99 million residents; has the 14th largest state GDP at $504.9 billion; and was at No. 11 on CNBC’s ranking of the Top States for Business in 2018.
But Michigan also is the only state in the Midwest with a negative LEI, which means the state needs to find “a new catalyst for economic growth,” he said.
Fortunately, the state — including metro Grand Rapids — has been working to diversify since the 1980s and now has a healthy mix of manufacturing, medical and life sciences, tourism, agriculture and technology companies. But many of these industries remain tethered to the success of the auto industry.
There’s only a 25 percent likelihood of a recession, Augustine said, but Grand Rapids business owners, executives and investors can protect themselves against the odds by following six key pieces of advice:
1. Keep an eye on clues to the next recession. “Too much of something” is required to experience a recession, including housing, capital expenditures, profits recession, pessimism, trade wars and debt.
2. Interest rates. They’re the gift that is giving on both sides of the balance sheet, as shorter-term yields now cover the inflation rate, and longer-term yields are staying contained — good news for savers and borrowers alike.
3. Do a portfolio inventory. Get investments focused and in order, including bonds, stocks, fund holdings diversified by category and real assets.
4. Small businesses. Consider how best to use the windfall from tax reform. Options include capital expenditures, employee retirement plans, health care plan additions, tightening up pensions and rationalizing debt.
5. Housing moves to be more balanced between sellers and buyers. It will be the beginning of a reversal of the seller’s market that has existed since the Great Recession.
6. Have patience with investment portfolios, as 2019 may “rhyme” with 1995, which “was a very good year for investors and a decent year for business,” Augustine said. Indicators to watch include Washington gridlock (but not hand-to-hand combat), Fed stops, no yield curve inversion, no recession, and higher trending stocks and real estate.
Augustine said he hoped investors were “patient” as the stock market plunged in the fourth quarter.
“The fourth quarter last year … we characterized as man-made, self-inflicted wounds that caused all those lines to go (up and down), and now policymakers (at The Fed) are walking back from that a little bit and everything’s up in this year,” he said.
“The theme of this presentation is looking for a recession. We don’t see one.”