The United Auto Workers union went on strike Monday morning against General Motors. Iran has reportedly attacked Saudi oil facilities. Both these events will generate more alarmist headlines, foretelling soaring oil prices or collapsing auto sales, and pointing to a looming recession. According to a recent tally, the word “recession” has occurred in more headlines over the past month than at any time since the financial crisis.
Democrats and their allies in the liberal media are so hoping for a downturn. The last thing they want to campaign against in 2020 is full employment and rising incomes. Consider last week’s Democratic debate, during which 10 leading candidates avoided all mention of the economy. It was a formidable performance, ignoring for three hours what has always been, and will always be, the top concern for voters.
It was not an accident. The Democratic presidential candidates who gathered for the debate in Houston know that Americans are feeling upbeat about their own prospects and, despite the very best efforts of a compliant media, are optimistic about the future. Selling voters on policies that would torpedo the country’s growth, such as Massachusetts Sen. Elizabeth Warren's proposal to overturn our capitalist system or Vermont Sen. Bernie Sanders' "Medicare-for-all" or New Jersey Sen. Cory Booker’s Green New Deal, is an uphill battle.
With unemployment low and jobs plentiful, incomes rising, and racial gaps narrowing, Democrats have a steep hill to climb even before they get to more contentious issues like abortion without limits or open borders.
The best Democrats can hope for is that the economy falls off a cliff between now and 2020. The liberal media has obligingly promoted dozens of reasons why this could happen at any moment. Interest rates are inverted! Interest rates are too low! Interest rates are too high! The Fed is not responsive; the Fed is too responsive! Trump’s tariffs are killing consumers, the farmers, manufacturers, or somebody?
Surely, there is a recession looming somewhere.
But, as it happens, not yet. Consider last week’s news. Retail sales in August rose 0.4 percent, double experts’ forecasts. Likewise, the University of Michigan reported that consumer sentiment bounced higher, beating estimates. If you think that such reports frequently come in above forecasts, you’re right. A spike up in Citi’s Economic Surprise, which measures real reports against expectations, suggests that reports from the media and from Wall Street have consistently been overly pessimistic.
Consider the alarm bells rung in recent weeks about the inversion of the yield curve, with short rates moving above those on longer-term bonds. Headlines blared that the shift guaranteed a recession was coming, if not already underway. But, as markets eventually realigned, and the flow of positive surprises continued, analysts came to conclude that this traditional precursor to a recession may no longer be reliable. The impact of the Federal Reserve and other central banks on interest rates is not only profound, it is also opaque. With a $4 trillion balance sheet, how the Fed buys and sells securities in its portfolio is unquestionably influential, and may have caused the rate inversion.
No matter. The harbingers of doom skipped seamlessly from inversion to the danger from rising mortgage rates, which increased along with a general recovery of long rates. “Mortgage rates had worst week in 3 years” blared one headline on CNBC, adding “it may be only the beginning.”
After breathlessly reporting that the rate on a 30-year mortgage had climbed 36 basis points (about a third of 1 percent) in the past couple of weeks, described as “bad news for borrowers,” the author had to concede that, “The good news is that rates are still incredibly low, and in the weeks before this turnaround, rates had fallen to the lowest level in three years.”
In fact, Matthew Graham, chief operating officer of Mortgage News Daily is quoted saying, “August was the best month for mortgage rates, and 2019 has been the best year since 2011. And that’s precisely why this terrible week is possible: It’s largely a technical correction to the feverish strength in August.”
Forgetting the silly headlines, the author inadvertently raises yet another reason to be bullish. If the economy is a four-cylinder engine, we are currently running on only two – consumer (the largest) and government spending. Business investment has dropped, in response to uncertainty about the trade battle with China. Also, the large housing sector has been largely AWOL throughout this recovery. Before the financial crisis, real estate construction amounted to nearly 9 percent of GDP; last year it was barely above 6 percent.
There are a number of reasons for the surprising drought of new building, including an initial glut of inventory produced by the housing bubble. Young buyers face constraints such as high levels of student debt. At the same time, millennials have largely chosen to be city-dwellers; the high cost of rents has made it difficult for many to accumulate the funds needed to make a down payment on a home.
My theory is that, beyond those contributing factors, the country is less confident that home ownership is the first infallible step to wealth creation. Buying a home is attractive for many reasons, especially as rents climb in urban areas, but buyers are more cautious than they were before. They know that people can lose money on their homes, a sour aftertaste of the financial crisis.
Nevertheless, with mortgage rates extremely low, a shortage of houses on the market and with household formations growing, we will almost surely have a boom in home construction in the foreseeable future. Housing starts peaked in the last cycle at better than 2 million; last year they totaled 1.2 million. That number will likely increase, spurring further growth.
Consumers are feeling positive about their prospects. A tight jobs market is driving wage gains and, in turn, consumer spending. It’s a virtuous circle that benefits everyone.
Except for Democrats who want to take back the Oval Office.