State of the economy

By: J. David Chapman/September 26, 2019

I am in Denver, attending the ARELLO Real Estate Commissioner College. The conference keynote speaker was Lawrence Yun, who is the chief economist at the National Association of Realtors.

Yun delivered a talk titled “Economic Forecast for Housing.” This was a timely presentation for me. It is particularly difficult to ascertain the state of the economy at this time because we are rapidly approaching a presidential election year – 2020. Unfortunately, it appears to me that much of what is reported in the press is intended to influence or motivate voters and not a true reflection of the state of the economy.

First, we are in the longest economic expansion in history in terms of number of months of GDP growth. This is encouraging; however, pundits would tell you that this simply means we are overdue for a correction and the results are not sustainable. The annual GDP growth for was 2.9% for 2018, but appears to be slowing and will not reach that level for 2019. This slower growth is consistent throughout all the developed countries.

Next, consumer confidence has been on a record run since July 2009 and is nearing an all-time high. The U.S. has generated 21 million jobs since 2010 and over 2.1 million in the last 12 months. This positive job growth has led to record employment rates in the U.S. We consider 5% unemployment normal and healthy, and the U.S. is running at 3.7%. This low unemployment has led to average hourly wage acceleration in the U.S. Lastly, after-tax profits are reaching all-time highs; however, these companies are saving capital and reluctant to reinvest.

Even with all this good news, pundits have analyzed the “inverted yield curve” to predict recession. Investors tend to get concerned when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds. This is an indication that people are worried about the near-term future and are investing in safer long-term investments.

I don’t believe an inverted yield curve is a foolproof predictor of a recession. While it is true that every recession since 1956 has followed an inverted yield curve scenario, there has never been one with interest rates at the historic low rates we see today. I would propose it simply doesn’t have prediction teeth with low interest rates.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).