Eric Rosengren. Photo courtesy of the Federal Reserve Bank of Boston
Every day brings a fresh crop of headlines full of warnings of a Hurricane Dorian-like economic storm that is surely just around the corner.
The stock market is gyrating, the bond market’s inverted yield curve is flashing “Recession Ahead” and the trade war with China drags on and on.
And there is pessimism in the local real estate market as well, with the apartment construction boom leveling off in Greater Boston and beyond as banks and other lenders, spooked by all the economic storm clouds, get cold feet.
Yet amid all the signs of trouble ahead, what if the recession–mongers are actually wrong this time?
Such is the reassuring, if counterintuitive, case Boston Federal Reserve Bank chief Eric Rosengren laid out last week in defense of the essential robustness and health of the American economy.
The Bears Have it Wrong
While acknowledging the warning signs, Rosengren, in a talk at Stonehill College in Easton closely watched by both Wall Street and the business and financial press, made a convincing case that it’s the bears, not the bulls, that have it wrong right now.
“Most forecasts of the U.S economy come up with a growth rate of 2 percent – they are not seeing a recession,” Rosengren said. “I would argue this is the time, we really have to be data–dependent. Does the consumer continue to spend? As long as we continue to see strong growth in employment and consumption, I am not overly worried.”
Having worked as a reporter for nearly three decades, I have a very well-honed distrust of happy talk.
It’s that nonsensical, optimistic-sounding rubbish that corporate chiefs and politicians love to spout when things have gone wrong in a big way or are about to.
Boston Fed President Eric Rosengren isn’t engaging in “happy talk” when he predicts the country will stay out of recession, despite fears about the yield curve and trade wars. He’s making a well-reasoned argument.
But Rosengren wasn’t indulging in happy talk. Rather, he was making a well-reasoned case as to why no one should losing be losing their heads right now, while being honest about the negative signs out there.
Yes, the stock market has been on a roller coaster ride. But, that said, even after an 800-point decline in August, the market is still near historic highs, having gained 50 percent since January 2016, he noted.
And sure, the inverted yield curve – a traditional recession warning sign – has hung like a black cloud over Wall Street for months.
Growing demand for the 10-year treasury notes has pushed down their yield for investors, while managers of short-term bonds are having to pay more attractive yields out more to attract buyers. This flip has been widely seen as investors voting with their feet, putting their money into longer-term debt as protection against a looming recession.
In fact, one reason long-term treasury rates have fallen does not have anything to do with the U.S. economy, but rather the worse–than–anemic rates offered by Germany on its equivalent, long-term negative debt, which is now offering a -0.7 percent rate of return, Rosengren noted.
That, in turn, has made 10-year T-notes more attractive to overseas investors given the choice between a small but positive return and a negative yield.
While “the inverted yield curve … has tended to precede recessions, I would argue the historical correlation may not be so applicable at this time,” Rosengren said.
Key Indicators Still Positive
Even the trade war, while certainly a potential drag, does not in and of itself spell doom for the American economy.
While countries like Germany, Japan and China are export–driven – more than half of German GDP comes from exports – in the U.S., that number is a far more modest 12 percent.
“It’s not to say it doesn’t matter to the United States, but it doesn’t matter as much,” Rosengren said.
Instead, as he calculates recession odds, the Boston Fed chief has his eye on two very different factors: the jobs market and consumer spending.
Despite all the handwringing, unemployment is near–historic, rock-bottom levels, at 3.7 percent.
And Americans keep buying which, in turn, keeps the nation’s huge, continent–spanning economy humming, with consumer spending up 4.7 percent in the second quarter.
President Donald Trump has been furiously lobbying the Fed on his Twitter account to cut rates, and Rosengren studiously avoided any specific mention of the Great Orange One in his talk.
But unless or until those numbers start showing signs of trouble, Rosengren would prefer to hold the line on further interest rate cuts.
Scott Van Voorhis
“We have to decide which of these signals to pay more attention to right now,” Rosengren said. “I don’t see as much of a need to take policy action as long as we are growing around 2 percent.”
All the bureaucrats, politicians and corporate executives out there, whose default mode is happy talk, could certainly learn a thing or two from the Boston Fed chief about communicating with the media and the public.
When it comes to getting your message across, straight talk beats happy talk every time.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
