Participants in BankBeatGroups’ inaugural webinar Jan. 18, received an optimistic economic forecast from KC Mathews, executive vice president and chief investment officer for UMB Bank, Kansas City, Mo. “Is This as Good as it Gets?” Mathews asked in the title of his presentation. Outlining what he called “the Magnificent 7,” he provided the answer: no.
“We came off a great year economically,” Mathews said early in his 20-minute presentation, using the following indicators to explain why he believes the U.S. economy is one to two years away from any possible economic downturn:
- U.S. Leading Economic Indicators: A composite that includes manufacturing, housing, stocks, et al., wrapped into one indicator shows that prior to every recession, this index drops to -3 about one year before the economy slips into recession. Currently, the indicator is a +3. Historically, the index takes a year or two to drops to the -3 point, he said.
- Consumer Confidence: While stock performance is a factor in consumer confidence, the nation’s unemployment picture is the greatest contributing factor. People who are working spend money, Mathews said. Low jobless rates linked to low interest rates and low energy costs support healthy consumer confidence. Historically, consumer confidence peaks 12 to 24 months prior to a recession. “Then it tumbles,” Mathews said. “Strong consumer confidence supports the argument for another good year through 2018.”
- Labor Market. Data on labor tells a similar story. About 12 months prior to a recession, businesses restrict hiring or right-size their workforces. With unemployment sitting at 4.1 percent and likely dropping, recession does not appear imminent. One caveat: inflation. “We know 4 percent unemployment is basically full employment, which is historically associated with inflation,” Mathews said. “Spiking inflation is bad for bonds, bad for stocks, bad for the economy.” Mathews provided data on unemployment during the 1950s and 1960s that shows inflation could suddenly spike. “That would bring the party to an end.”
- Commodities. Using copper pricing to provide insight into commodities and, by extension, the global economy, Mathews explained demand from China is keeping commodity prices strong. “It tells me we have at least 12 months before a global recession,” he said, adding, “new data coming out now are better than expected.”
- U.S. Yield Curve. Explaining that the yield curve has a perfect track record for predicting downturns, Mathews said the yield curve becomes inverted 12 to 24 months before a recession. The yield curve today shows long-term bonds paying much more than short term bonds; the markets are nowhere near an inversion, so the yield curve in no way indicates coming recession.
- S&P 500 earnings per share. “Increased earnings drive stock prices, eventually,” Mathews said. Earnings peak prior to a recession, he said. “We just saw 15 percent earnings growth last year before tax reform and without a stimulus,” he said. Mathews said he believes corporate earnings would reap the greatest benefit from tax reform. “We might not see better returns in the stock market,” he said. “We got 22 percent [earnings] growth in 2017 and we might get another 14 percent” this year.
- Fiscal Multiplier. Mathews said federal spending would result in stronger impact than tax cuts. “Infrastructure spending could be a multiplier of 2.5 or could be 0.5; but tax cuts have never had more than a multiplier of 1.0,” he said. Tax cuts, which Mathews called “somewhat unnecessary,” are pushing the markets up, which means, historically, the strong returns will continue for two years. “We are in the midst of the longest economic expansion in history,” Mathews concluded.
BankBeatGroups bring together mid-career banking professionals, online and in-person, for the purpose of professional development and peer networking. Operating throughout the Upper Midwest, BankBeatGroups offer emerging industry leaders opportunities to expand their professional scope/perspectives and knowledge.