Economic Commentary

During the month of January, our team at Greenleaf Trust traveled throughout our geographical markets presenting our 2019 Year in Review and 2020 forecast for the economy and financial markets. It was my privilege to join Nick Juhle, our senior vice president and director of research, as well as Chris Burns, a senior fixed income analyst within our research team, to participate in the seminar series. Our journey took us to Kalamazoo, Grand Rapids, Birmingham, Traverse City and Naples, Florida. We had the opportunity to meet with over 500 clients, friends and prospective clients of Greenleaf Trust and learn what was on their mind concerning the economy and financial markets.

In 2004, Google created Google Analytics, which was a service developed to measure search preference on their platform. The analytics have a variety of uses such as allowing advertisers a window into what topics, blogs, videos, social platforms etc. are visited most by the demographics that they are directly appealing to. The analytics are detailed and can be a useful tool for political and marketing campaigns. The results can also provide a window into what consumers and users of Google are interested in or worried about.

In February of 2009, the word recession was among the most searched terms on the Google platform. We were in the beginning stages of one of the deepest and most severe recessions in our country’s history. National unemployment was at 8% and we were losing nearly 500,000 jobs per month. The popular media, both electronic and print, were filled with content about bank failures, mortgage foreclosures, plant closings, automotive company bankruptcies, government bailouts and personal suffering. It was perfectly understandable that the recession we were in was top of mind of the American public.

Fast forward to August of 2019, and you might be surprised to learn that the search analytics reveal that recession topic search requests have returned to the level seen in 2009. We know that concerns about a future, not current, recession is on the mind of consumers and you, our clients and friends of Greenleaf Trust.

During the past year, in several newsletter articles and e-mail blasts to clients, Nick Juhle and his talented team of research analysts have presented solid reporting and analysis on the economic indicators that we monitor on a regular basis to make certain that we have an accurate pulse on the health of the US and global economies. Our message to you was that the critical indicators most reliable to indicating prior recessionary trends were in positive territory and the threat of an impending recession was not evident to us.

The recession that actually began in late 2007 is the most recent recession that investors have in their memory bank. It was sharp, severe and devastating to nearly everyone. People lost retirement savings, homes, jobs, businesses and entire careers. It is understandable that the word recession causes concern. Nick Juhle’s team demonstrated in several articles that most recessions are not the variety of 2007–2008 or 1929, but rather are more typical business cycle recessions that last for a much more limited time and have an equally more tempered impact on equity and fixed income markets.

The reality is that we have now entered into the longest economic recovery in our country’s history, and our current unemployment rate is the lowest it has been in 50 years; thus, it is logical to ask when will the recovery fade out and secondly, what will be the impact of it doing so?

Regular readers of this economic commentary know that my later focus begins and ends with the consumer. I want to know the following:

1. Is the consumer employed? The answer is a resounding yes, as measured by our current 3.5% unemployment rate.
2. Is the consumer spending? The answer, as indicated by retail sales, is yes and consistently so.
3. Are those employed receiving pay increases at or above inflation rates and for the past 20 months? The answer is yes.
4. Is household debt increasing and savings deteriorating? The answer is no. The balance sheet of both the consumer and businesses is stronger today in many ways than in 2007. Mortgage quality has improved as has overall credit quality scores. (These data points do not include student debt, which remains a significant issue.)

Consumers drive nearly 70% of US GDP and that portion of GDP output drivers continues to be in solid condition.

Private investment (Business and Housing) comprise 17.5% of GDP. Housing, which comprises 11% of GDP, remains in good condition with demand and price in relative equilibrium. Business investment remains weak and is continuing to be impacted by tariffs. We are optimistic that recently announced trade deals will positively impact business investment in productivity enhancing technology and capital goods.

We are now fully into an election year. Republicans were deficit hawks during the Obama administration but are spending at a rate that will add in excess of a trillion dollars to our federal deficit. Long-term deficit growth is a significant problem, but in the short term of 2020 increased government spending will be a stimulant to the economy, and government spending represents 17.5% of GDP.

On balance, the three major components of GDP growth suggest that the probability of recession in 2020 is limited. There are always risks to any economy, and the reality is that while unemployment is low and the consumer is confident and spending, business investment is weak and our overall GDP growth is slightly below an annualized trade of 2.4%. Domestic and geo-political issues can impact slow growth rate economies. The coronavirus is currently growing and countries are tightening borders and travel. It is hard not to imagine that prolonged interruption of travel and commerce will potentially impact demand and output. More will be revealed daily, but it is too early to calculate economic impairment at this time.

The Iowa Caucuses were advantageous to the media as more controversies were created but few answers were delivered on voter preferences. Perhaps the most obvious result of the Iowa caucuses was that they need to be replaced with a traditional primary structure. If the Sanders and Warren camps were hoping for a decisive showing, they didn’t get it. Moderates within the Democratic Party have to be encouraged by the strong showing of Buttigieg, though at this writing the results are incomplete. Future primaries scheduled within the next two weeks will provide a much better assessment of where the Democrats are headed with respect to their candidate and how the split between the progressive and moderate wings of their party will resolve the need to select a candidate that can motivate party unity.

President Trump delivered his State of the Union Speech on the eve of his Impeachment acquittal in the Senate. This set of circumstances seems bizarre, yet it reminds us of the same set of circumstances that faced President Clinton in 1998. Each President chose different strategies that reflect their political personas. Each spent time on their respective economic headwinds, but that is where the similarities ended. President Clinton chose a conciliatory and almost confessional tone, with pledges to work on bipartisan proposals in the coming year. President Trump chose a campaign rally approach that left the division between the parties more, not less, divided and provided a clear view of what we can expect to see and hear for the next nine months in this election year.