Gold's 2019 Breakout – It's Just Getting Started
October 17, 2019
Capital Group video transcript: “2020 economic watchlist: Manufacturing, trade war, recession”
Will McKenna: Darrell, why don't you pick it up and talk a little bit about the economic outlook. Let's start with the U.S. I want to hold off on the R word, recession; we got plenty of questions about that. But just start with the U.S. What's your outlook for the U.S. economy in 2020?
Darrell Spence: We think we're going to get a bit of a re-acceleration. And maybe a different way to phrase the inflation/deflation debate is — even though you said you didn’t want to get into it — recession or no recession. And I think we're starting to get the answer to that.
But what we've had in the U.S. economy for a while is what we've been calling this tale of two economies. You have kind of a weak industrial sector because of the trade war, because of the inventory stocking that proceeded the trade war, while at the same time you have a really, really healthy domestic economy, which is largely the U.S. consumer. And so you look at the growth of those two areas of the U.S., and they've diverged pretty dramatically. It's very similar to what we saw back in 2015 and 2016. And at the end of that episode, essentially the industrial sector recovered, and we think that is likely to be the case this time around.
So as we move through the remainder of 2019 and into 2020, we think some of these fears will be moving out of the markets, and you're starting to see that, I think, perhaps with some of the bond yield movements and equity price movements that we've seen over the past couple of weeks. But a lot of that is predicated on no further escalation in the trade war. And we seem to have found some type of truce here, and we don't think you need to go backwards. Tariffs don't need to come off to continue to have a more optimistic outlook in 2020. But you probably can't have much more of an escalation either. And again, we think we’ve found some type of truce, but it's kind of day to day when it comes to this type of stuff. So that's the one caveat in all that, I would say.
Will McKenna: You mentioned a pickup, again, in manufacturing. What do you think will help drive that?
Darrell Spence: Well, one would be a truce in the trade war, for sure. The two areas that have caused the manufacturing sector weakness are exports — and we're starting to see some indication that those are rebounding — and the other had been the inventory stocking that occurred in anticipation of the trade war. And when you look at, say, inventory sales ratios across the manufacturing sector, they're starting to come down. So a simple turn in those two things, we think, will lead to better activity and better output. But again, that assumes no further escalation in the trade war, too.
Will McKenna: Any signs of recession on the horizon? Or you and the team don't see that, certainly in 2020, and maybe it's pushed out a ways?
Darrell Spence: We don’t. I mean, there's always a chance you get some type of shock that, by definition, you almost can't see coming. But keep in mind that recessions aren't just about the amount of time that's gone by or how long the economy has been in an expansion. They're about excesses and imbalances that built up in the system that ultimately need to be corrected. And we do actually see some late-cycle excesses and imbalances building up. A lot of it is concentrated in corporate debt and leveraged loans.
But even then, just because you have a lot of excesses and imbalances building up doesn't mean they have to cause a recession. You need some type of catalyst that ultimately causes those things to be a problem. And then the excesses are the accelerant that ultimately push the economy into a recession. And historically — and we think this time around, too — the most likely catalyst is tighter monetary policy. And in fact, over the course of 2019, we’ve moved in the opposite direction.
So even though these risk areas are still out there, until we probably get meaningfully tighter monetary policy and tighter liquidity conditions — or essentially a reversal of the conditions that have allowed this debt and this leverage to build up — there's probably not a reason that it has to unwind anytime soon. So our best guess — and guess is the word I would emphasize there — is probably sometime late 2021 would be the most likely time frame, again, assuming that the Fed eventually gets back into the tightening game. But that could be a while.
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