The “Art of the Deal” Gone Wrong
I have frequently pointed out in previous Wealth Watch articles how the U.S. economy is now in the “late phase of the business cycle.”
And without fail, my comments typically trigger a ton of reader emails, most asking if we’re headed for a recession or if our economy is already in one now.
I keep a watchful eye on dozens of economic and market indicators with the goal of identifying where we are in the cycle and to better inform my investment decisions.
These indicators have sent mixed signals in recent months, but the majority are still positive.
There’s One Big Exception
The New York Fed tracks the probability of a U.S. recession on a monthly basis, and the latest reading, shown above, puts the odds of an economic contraction sometime over the next year at the highest level since the Great Recession in 2008!
In fact, the New York Fed’s recession warning has been rising steadily for over a year now. In April, the indicator shot up to 27.5%. This level has proven to be a prophetic and accurate indicator. We saw the same early-recession warning signals in 2007 and back in 2001.
This indicator is based on credit spreads, specifically the spread between 10-year and 3-month Treasury yields. No doubt you’ve heard about this indicator, most often described as the dreaded inverted yield curve.
But other independent data are also signaling potential trouble ahead for the economy.
It has to do with the ongoing trade war, which took another turn for the worse last week.
The Art of No Deal?
In the graph below, you can see U.S. merchandise exports have been in a free fall since the trade war heated up last year. Near the end of 2018, as the stock market swooned, exports actually went negative on a year-over-year basis for the first time in over four years.
After a brief bounce early this year, export data are rolling over again. And they are bound to get worse with trade tariffs on the rise again.
To be sure, other economic data remain on solid ground, including the Index of Leading Economic Indicators and U.S. GDP growth, which expanded at a stronger-than-expected 3.2% clip in the first quarter.
But make no mistake, the worsening trade war is a major head wind for the U.S. and global economies.
As I have said repeatedly, nobody “wins” a trade war. And the biggest losers are consumers and businesses, which wind up paying higher prices for everything. That’s a major drag on growth at a time when this late-stage economic expansion already appears fragile.
I’m keeping a watchful eye on all my favorite indicators and hoping for a relatively quick art of the deal getting done on trade.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch