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Pre-recession Could be Current State of U.S. Economy, Emotionally!

By Glenford S. Robinson

The current state of the economy is somewhere between the euphoria point of the expansion phase and the anxiety point of the recession phase, not too far from the denial point of the recession phase, in terms of human emotions, currently being displayed by investors in the financial markets. Accurate pinpointing of the current phase in the economic cycle is like catching a fish with bare hands.  

Defining a recession as two consecutive quarters of negative GDP growth doesn’t tell the whole story of the effect human emotions has on the financial markets. Before there is any consecutive quarters of negative GDP growth, there is the impact of human emotions on the financial markets, which should be taken into consideration. So, by the time two quarters of consecutive GDP growth hit the headlines, investors’ emotions would’ve already nosedived into depression, dragging down the economy with it. That scenario could be the vampire plaguing the current U.S. Economy.

The human emotions effect on the movement of financial markets cannot be quantified or accurately measured. Therefore, correctly identifying the exact phase of the economic cycle or business cycle is not an easy task when taking into account the effect human emotion has on the economy.

The Federal Reserve Mr. Jerome Powell gave a favorable outlook to the overall growth of the U.S. economy during his speech at the Challenges for Monetary policy, Jackson Hole symposium recently, while giving an unfavorable growth outlook to the Global economy.

The overall growth outlook of the U.S. economy may seem favorable for now, but there are obvious signs that things could be changing for the worse. The Fed Chairman’s recent 25-basis point interest rate cut has shown signs of pumping up the inflation rate closer to the desired 2%. However, uncertainties such as the ongoing US-China trade war, the increasing possibility of a hard Brexit, and rising tensions in Hong Kong still exist and could quickly limit the ability of the Feds to act appropriately in sustaining the current U.S. economic expansion.

The U.S Economy might be in the expansion phase of the business cycle, but could very well be close to the end of it, which would be characterized emotionally by a mixture of euphoria and anxiety displayed by investors in the financial markets. This could be the reason why we have seen so much volatility in the financial markets. The Feds could be in denial as to where the state of the economy is currently. Investors have begun to display anxiety. The signs of that anxiety have carefully been displayed in the equites market and the forex market on many occasions through the display of rampant display of volatility.

The S&P 500 has gyrated up and down, giving up big gains, then recouping big gains back again over the past few months. That is what we call volatility in the equities market. The EUR/USD currency pair has facilitated the exchanged of punches between the two currencies with wild swings well over 100 pips in both directions on occasion. That is what we call volatility in the Forex market. We don’t know when all this is going to end. We only can wait and see what Brexit, Hong Kong, Trade War, Interest Rate War, and currency war will have in store for us investors and traders.

The U.S. Pending Home Sales Report came in below forecast of 0.1% to a current reading of -2.5% from a previous mark of 2.8%, another tell-tell sign that the U.S. economy could indeed be receding. The National Association of Realtors (NAR) Pending Home Sales Report measures the change in the number of homes under contract, ready to be sold but still awaiting the closing transaction between the buyer and the seller. New construction is excluded. A higher than expected reading is perceived as positive for the U.S. dollar while a lower than expected reading is looked at as a negative for the U.S. dollar.

The Institute of Supply Management (ISM) Purchasing Manager’s Index for Manufacturing came in well below forecast of 51.1 to a current reading of 49.1 in August 2019 falling below the previous month’s reading of 51.2. The latest reading showed the first month of manufacturing sector decline since January 2016, causing a reduction in new orders and employment. The cause of such decline again is the ongoing US-China trade war. ISM Economic Reports such as the Manufacturing PMI is 85% correlated with GDP numbers. The ISM therefore provides business confidence in the United States. The latest PMI of Manufacturing Report therefore paints a grim picture as to the possible outcome of future GDP numbers. This is yet another tell-tell sign that the U.S. economy is not as strong as one would think.

However, globally speaking, the U.S. economy is still the strongest among a bunch of weak and declining economies. Therefore, investors will nevertheless invest in the strongest economy, no matter if that economy is also weak, once it is much stronger than the rest. This is the plight of the U.S. economy. It is only strong because all the others are weak.

Germany’s economy, the largest in the European Union, recently showed signs of heading steadfast into a recession. The country’s central bank cautioned that a decline in exports during the third quarter was very likely to continue into the fourth quarter and possibly beyond.

The Deutsche Bundesbank of Germany warned that a drop in car orders and industrial equipment orders in the second quarter was very likely to continue into the third quarter, which would vigorously propel the economy toward a full blown recession, defined as two consecutive quarters of negative economic growth, measured by the country’s gross domestic product (GDP).

We are living in a global economy because all economies interlink with each other. One affects the other, just like how each currency in an interacting currency pair pulls two countries’ economies together through transactional interlinking.  Therefore, if one currency affects the movement of another in a currency pair, so does one economy affect the other, and so can the U.S. economy be greatly affected by the decline of the European economy’s largest contributor, Germany.

The German bank blamed the steep drop in exports on Brexit and the US-China trade war, saying that those two factors were the cause of the 0.1% drop in GDP growth for the quarter leading into June, which would most likely continue for the quarter leading into September. if such scenario plays out, the German economy would find itself in a full-blown recession (two consecutive quarters of negative GDP growth).  

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