Free Trial

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$$$,MT$$$$,MX$$$$]

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.