No Indication Recession is Imminent, Says Economist Roger Tutterow

Roger Tutterow delivers his keynote address at InterFace Seniors Housing Southeast.

ATLANTA — Expect the U.S. economy to remain in an expansion mode through early 2020, effectively staving off the threat of recession, but look for the pace of growth to continue to slow.

That’s the message Roger Tutterow, professor of economics at Kennesaw State University (KSU), is delivering to the commercial real estate industry based in part on the Leading Economic Index compiled by the Conference Board, a non-governmental organization.

The monthly index, which is used to determine future economic activity, tracks 10 key components, some of which include building permits, stock prices, new orders for capital goods and initial jobless claims.

“Over the last six months the leading indicators were up eight-tenths of a percent, so we’re not getting a recession-is-imminent signal from the leading economic indicators,” emphasized Tutterow. “What we are getting is a signal that says economic growth remains in place, but at a more timid pace than what we’ve enjoyed in the past couple of years.”

Tutterow’s comments came Wednesday morning, Aug. 28, during his keynote presentation at InterFace Seniors Housing Southeast. Hosted by France Media’s InterFace Conference Group and Seniors Housing Business at the InterContinental Buckhead Atlanta, the one-day conference attracted 436 professionals from all corners of the industry. Participants gathered to network and attend a variety of panel discussions that focused on timely issues and trends.

What are the odds of a recession?

The current U.S. economic expansion celebrated its 10th anniversary in June and has now stretched to 122 months — the longest expansion of the post-World War II era. The average economic expansion in that span has been 58 months.

Nonfarm payroll employment gains have averaged slightly more than 140,000 per month during the past six months, according to the Bureau of Labor Statistics. By comparison, job gains averaged approximately 185,000 per month in 2018 based on the newly revised figures.

“Here is the good news that I bring you today: Economic expansions do not die of old age,” said Tutterow, who also serves as director of the Econometric Center, a research center housed in KSU’s Coles College of Business.

“Economic expansions die because of bad policy, because of asset pricing bubbles that build and pop, because of over-accumulation of assets and over-accumulation of inventories that have to be corrected, and because of a portfolio of exogenous shocks like oil embargoes and terrorist attacks and military excursions — things that we quite candidly cannot predict,” explained the veteran economist.

U.S. gross domestic product (GDP) grew at an annualized rate of 3.1 percent in the first quarter of 2019, but slowed to 2.1 percent in the second quarter, according to the Bureau of Economic Analysis.

While the risk of recession over the next 12 to 18 months is significantly higher than it was two years ago, it is far from a done deal that the U.S. economy will contract in the near term, says Tutterow.

“Our expectation is that over the forward-looking 12 months, the risk of recession should be no more than a one-in-three chance. Now keep in mind that the economy is in recession about 11 percent of the time. Normally a one-in-nine chance would be a randomly selected probability. A one-in-three chance is elevated, but it is far from a done deal that this economy is headed into contraction,” reiterated Tutterow.

Consumers remain resilient

Consumer confidence is a huge factor in the U.S. economy because it is inextricably linked to retail sales. That’s why Tutterow closely follows the Michigan Consumer Sentiment Index, a monthly gauge of how households feel about the state of the economy. Consumer confidence, which had remained strong, took a hit during the partial U.S. government shutdown that stretched from Dec. 22, 2018 to Jan. 25, 2019, a total of 35 days.

“The government shutdown and concerns over how long the government would be out of business brought uncertainty into the household and corporate sector,” said Tutterow. “Neither of those sectors benefit from more government uncertainty.”

The index plummeted from a reading of 98.3 in December 2018 to 91.2 in in January of this year, but then rebounded to a reading in the upper 90s to 100 during each of the ensuing six months.

“Once the shutdown ended, confidence came back up and for the most part it is toward the top of the range that we would consider normal,” said Tutterow.

“While my friends in the national media may be sharing with you some stories about the [inverted yield curve] and the risk of recession, I will tell you that Main Street America, for the most part, still remains confident about the economy and its near-term prospects.”

Strong dollar is economic conundrum

The U.S. dollar appreciated by one-third against major foreign currencies between 2011 and January 2017. The conventional wisdom is that a strong dollar is a vote of confidence in our nation’s capital markets, but it also creates winners and losers, according to Tutterow.

“A strong dollar is great if you are taking your significant other to Paris or Milan for Labor Day weekend because it will go further,” explains Tutterow. “It’s great if you are sourcing raw materials from abroad. But if you are producing products in Atlanta, Georgia, and you are selling them in the global markets, that strong dollar makes you more expensive on global markets. It makes foreign-produced products cheaper here. So, it hurts us on trade. It hurts us on manufacturing.”

Why Trump is fixated on The Fed

Starting in mid-2018, U.S. President Donald Trump began tweeting and commenting publicly about his unhappiness with a series of rate hikes by the Federal Reserve.

Specifically, the Fed raised the short-term federal funds rate by a quarter point on nine separate occasions between December 2015 and December 2018. Only after the U.S. economy began to show signs of slowing earlier this year did the Fed opt to cut the fed funds rate by a quarter point to 2.25 percent in July.

Trump is concerned about the Fed raising interest rates in today’s environment for a few different reasons, according to Tutterow, the first of which is a textbook explanation. “When you raise interest rates, the cost of borrowing goes up for households. They borrow less and spend less. The economy slows. Or you raise interest rates and the cost of debt goes up in the corporate sector, and they borrow less and invest less in CapEx and they fund less new construction, and the economy slows.”

The second reason Trump is concerned about rate hikes is that “to his core he is a commercial real estate guy,” Tutterow pointed out. “I know that if I turn down the lights and nobody can see, you’ll admit the one thing that unifies all commercial real estate folks is the idea that everywhere on all seven continents, 365 days a year, the appropriate interest rate for the economy is always zero percent. And [President Trump] clearly has some of that in his DNA as well.”

Likely a third reason Trump frowned on the Fed’s tightening monetary policy is that increases in short-term rates historically have led to an appreciation of domestic currencies. “[The president] may be concerned that through executing domestic monetary policy, the Fed will support a stronger dollar and will offset what he’s trying to do on the trade side.”

In other words, if Trump imposes a 10 percent tariff on Chinese imports to help the U.S. level the playing field on trade, but the U.S. dollar appreciates by 10 percent, the net effect is zero.

Predictions of the Federal Reserve’s next move on interest rates can shift quickly, Tutterow reminded the senior living industry. Six months ago expectations were for three rate hikes by the Fed in 2019, not a rate cut in July. “Expectations change quickly as data and the environment change,” Tutterow concluded.

— Matt Valley

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