Recession fears diminish as the nation approaches a Goldilocks economy

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For months, several reports indicated the U.S economy was quickly approaching what many feared to be a recession.

After all, America’s looming trade war with China ignited geopolitical headwinds that posed a significant threat to the nation’s economy.

In fact, a poll of economists conducted by Reuters revealed that the median probability of a recession within the next year rose to 25% in January.

Additionally, a survey produced by the National Association for Business Economics, which detailed the economic predictions of 281 members, determined that 75% of its economists expected the economy to slip into a recession by the end of 2021.

“Three-fourths of the NABE Policy Survey panelists expect an economic recession by the end of 2021,” said NABE President Kevin Swift, CBE, chief economist at the American Chemistry Council. “While only 10% of panelists expect a recession in 2019, 42% say a recession will happen in 2020, and 25% expect one in 2021.”

These economic projections paired with mounting evidence that the nation’s housing market was slowing down pointed to the probability of an approaching recession.

However, Friday’s Gross Domestic Product report produced by the Bureau of Economic Analysis signaled the economy was strengthening. In fact, Q1’s readings even surpassed the 2.4% growth estimate produced by a poll of economists conducted by CNBC and Moody’s analytics. 

According to the Bureau’s advanced estimate, real GDP increased at an annual rate of 3.2% in the first quarter of 2019, compared with a gain of 2.2% in the prior three months.

This marks the first acceleration of growth since mid-2018, highlighting economic improvement.

“Although this advance estimate is subject to revision, if it holds up, this faster growth should continue to provide strong support for the job and housing markets,” Mortgage Bankers Association Chief Economist Mike Fratantoni said. “Growth was driven in the first quarter by an increase in inventories and a strong reading on net exports, two factors which could be reversed in the second quarter. Household spending growth actually slowed a bit in the first quarter, which is a bit contrary to recent strong readings on retail sales. Overall, a solid start of the year for the economy.”

Although Fratantoni said Q1’s results were strong, Navy Federal Credit Union Corporate Economist Robert Frick claims they are actually skewed.

“GDP stomped estimates, coming in at 3.2%, but the first quarter report was market by unusual data that inflated it temporarily–mainly short-term boosts from higher inventories and from trade (which added one percentage point alone),” Frick said. “If you factor out those one-offs, you get GDP rising at just 1.3%, as measured by final sales to private domestic purchasers.” 

If GDP growth did rise at 1.3% this means Q1’s acceleration falls behind the fourth quarter of 2018, signalling the economy still has a tangible risk of an oncoming recession.

That being said, Frick notes that the economy can still find its way out of the woods as the likeliness of a recession may be a long way off.

The data may be showing that the economy is growing, but not fast enough to spark a level of inflation that would force the Fed to hike rates. That balanced state of “not too hot, not too cold” is known as a “Goldilocks economy,” a phrase coined by economist David Shulman in the 1990s.

“First, inflation was low, indicating that the Fed had no reason to raise rates that could tip the economy into a contraction. Second, while the headline number was 3.2%, after backing out trade and inventories the number was just 1.3%, showing the economy isn’t overheating, which again could prompt the Fed to raise rates,” Frick said. “Finally, while the 1.3%, as measured by ‘final sales to privated domestic purchasers’ is a low number, it will rise with the recovery of consumer spending and some other factors. So a reasonable forecast for GDP this year is 2% to 2.5%, which, together with a strong jobs market and rising wages, point to a healthy Goldilocks economy with no looming economic issues in sight.” 

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