RPT-MNI INTERVIEW: Little Threat of US Recession-Fed Economist

By Jean Yung

     WASHINGTON (MNI) - There is little chance recession will cut short the

near-record U.S. expansion, Federal Reserve Bank of Chicago economic adviser

Bill Strauss told MNI, noting that a yield curve inversion last month has more

to do with weakness in longer-dated bond yields than the Fed's hikes in

short-term rates.

     There's little sign of overheating in any sector that would put growth at

risk, and low interest rates should continue to boost investment in

manufacturing and home building this year, he added in an interview.

     "We're looking at a U.S. economy that's poised to tie the record for

duration of economic growth at the end of June, at 120 months of consecutive

gains," Strauss told MNI, "So one has to be thinking about risk for a recession,

but nothing jumps out at me."

     Growth has averaged just 2.3% since 2009, "barely over what we consider to

be trend growth for the economy," he said. "You don't see any sectors that

appear to have gone too far or got too hot that would make us concerned."

     Even the U.S. automotive industry, which last year saw its best four-year

period in sales history, was "relatively restrained in pushing product to those

who shouldn't be buying it," Strauss said.

     --FLAT YIELD CURVE

     The 3-month-10-year Treasury yield curve inverted after the FOMC said it

projected no interest rate increases this year in light of financial and global

risks, a sharp reversal from its forecast of two rate hikes in December. Yield

curve inversions have preceded every recession over the past 60 years.

     But Strauss cautioned that the curve has in the past stayed inverted for a

sustained period ahead of a recession, but in this case has already reversed

back into positive territory.

     "For the month of March, the 3-month-10-year still remained positive, but

it's very flat," he said. And on the positive side, low 10-year rates will

support investment and capital spending, especially in light of a very tight

labor market.

     "The fact that it remains challenging to find qualified workers means

employers are moving back to labor substitution by investing in capital," he

said.

     --MANUFACTURING, HOUSING SLACK

     Measures point to slack in both housing and manufacturing, which could

absorb faster growth without provoking inflation, Strauss said.

     Housing starts remain some 100,000 units short of the 1.5 million monthly

pace seen in typical expansion periods, while capacity utilization for

manufacturing has been running a few percentage points below its long-run

average.

     "Housing is still not up to a level that's considered normal, and we still

have excess capacity in manufacturing. So having relatively low rates will give

a boost to housing and the investment cycle this year," he said.

     Above-trend productivity growth is also expected to offset wage pressures

from the tight labor market over the medium term, meaning "business won't have

to raise prices very much to compensate for rising labor costs" and keeping

inflation around 2%, he said.

     --TRADE HEADWINDS

     Uncertainties over the Trump administration's trade policies have damped

business activity, but Strauss noted that tariff hikes so far have not

significantly set back the U.S. economy.

     "Our tariff rates basically went up to that of our global competitors," he

said. "It's made us less price competitive, but so far the tariffs in place

don't make us outliers."

     That said, further tariff increases would hurt, and President Trump's

threat to close the U.S.-Mexico border would create disruptions for the closely

integrated supply chain.

     Measuring the temperature of the economy, Strauss said he had just visited

the American Steamship Company, which moves iron ore and coal for the Great

Lakes steel mills and energy plants. Its executives "remain cautiously

optimistic that 2019 will be a good year," he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]