Tag Archives: unemployment

Uneven Economy & The Hidden Depression

Are we in a depression? The question seems absurd. There has been GDP growth since 2009 and some mild inflation to go with it. In fact, this is the second longest economic expansion on record. As Robert Shiller said over the weekend (though in the context of warning against complacency), “[i]f the economy manages to expand for 16 more months, the United States will have set a record.” Unemployment is the lowest in history, nothing like the 17% we had by a U.S. Bureau of Labor Statistics estimate a decade after the stock market crash in 1929 and the average of 18% in the 1930s. House prices have come screaming back across the nation. The stock market has increased by more than 15% annually beginning in 2009. And even middle-class wages have shown signs of picking up lately.

Depression-Era Demographics In Some Exurbs

And yet, even overlooking the opioid epidemic and the 42 million Americans on food stamps (happily down from nearly 48 million in 2013), there are disturbing signs around the country that all is not well. For example, a recent article in the New York Times by Robert Gebeloff focusing on Hunterdon County in New Jersey shows that many suburban and exurban Northeast and Midwest counties have stopped booming. More people are dying than being born or moving in through immigration or migration. Hunterdon County, 60 miles from New York City, is the sixth richest county nationally with a median household income is over $100,000. But young people are having fewer children, and the recession-stalled migration patterns are only resuming in certain parts of the country. According to Geberloff, “Some of the once-fastest-growing counties in the United States are growing no more, and nationwide, the birthrate has dropped to levels not seen since the Great Depression.” Since a recent peak in 2007, lifetime births per woman in the U.S. is down 16%.

Because deaths are outnumbering births in so many outer-ring counties, flummoxing demographers waiting for a trend reversal, migration is crucial. But lower immigration puts stress on Northeastern suburban counties losing population to the South and West. And while more people living in cities may lower long-distance commuting and urban decay, “population stagnation in places that had been growing will most likely bring its own sets of problems, including pressures on real estate values and eventual shrinking of political representation.”

While births have declined, migration within the U.S. has resumed to pre-recession levels. However, the trend if toward Florida, Texas, and Arizona, which have all seen population inflows. Rural parts of the country have been struggling with these demographic problems for a while now, but Gebeloff’s article shows that they are hitting what have been much more well-off areas now. In Hunterdon County, a 460-acre Merck campus sits abandoned, and enrollment in some school districts is down 20%.

Patio Man Still Thrives

But if outer ring Northeastern suburbs are in jeopardy, that’s not the situation everywhere. In 2002, when it looked like exurbia or life in what he called “Sprinkler Cities” was the future, David Brooks wrote a column for the Weekly Standard called “Patio Man and the Sprawl People” partly about how urban types were annexing old line, inner ring suburbs, while more traditional suburbanites were claiming the outer rings where they could enjoy peaceful patios, happy kids, slender friends and “the massive barbecue grill towering over it all.”

Now, it seems, the outer rings are struggling mightily, but perhaps only in the Northeast and Midwest. In other words, Brooks’s 2002 analysis somehow holds up today.  This is how he described the trend in defending suburbia, or the movement from old suburbia to new suburbia — “The truth, of course, is that suburbia is not a retreat from gritty American life, it is American life. Already, suburbanites make up about half of the country’s population (while city people make up 28 percent and rural folk make up the rest), and American gets more suburban every year.” And they make up 53% of America now, according to Jed Kolko in a post for the statistically oriented news site, FiveThirtyEight. Moreover, in a 2017 post, Kolko wrote, “The suburbanization of America marches on,” as he noted the fast growth of Southern and Western metro areas, including Cap Coral-Fort Myers, FL, Provo-Orem, UT, and Austin-Round Rock, TX. Kolko also highlighted educated rural areas and the Pacific Northwest as growing regions. Those include Olympia and Spokane in Washington and Eugene and Salem in Oregon. Boise also made his list for growth of metro areas with 250,000 or more people.

The big population losers, unsurprisingly, have been rural areas. And while the “urban revival” is real, according to Kolko, it has mostly been for rich, educated people, in particular hyperurban neighborhoods rather than broad-based return to city living. Patio Man continues to thrive – just not in Hunterdon County, New Jersey.

Overall, the country is hardly in a depression, but things are grimmer than many think in some surprising places.

PIMCO: “New Neutral” Mostly Intact

It’s hard for one of the biggest bond managers in the world to forecast a recession when financial conditions are as favorable as they are now. Still, PIMCO isn’t sure if the global economy is being propelled by the “sugar rush” of easy financial conditions. The firm’s global Economic Advisor and Chief Investment Officer of Global Fixed Income, Joachim Fels and Andrew Balls, respectively, write in a new paper that their base case hypothesis remains that the global economic expansion is demand-driven, but they have “considerable uncertainty around this key question.”

Fels and Balls report that the bond behemoth in Newport Beach, Calif. now forecasts modestly higher 2018 GDP growth than it did at the end of 2017 in the U.S., eurozone, the U.K., and China. However, it has lowered its expectations for Mexico and India. Overall, the global forecast for growth remains in the 3.0%-3.5% range.

PIMCO concedes that their forecasts are baked into asset prices. In other words any disappointment on growth or inflation estimates would spell bad news for portfolios, so the firm remains conservatively positioned.

PIMCO views the U.S. Government’s infrastructure plan as having a “low probability” of passing through Congress anytime soon. The firm’s municipal bond team offered that contribution from the states to such a plan would be limited given “lack of fiscal space in many state coffers.”

On trade policy, PIMCO expects the tariff proposals on steel and aluminum to be “watered down further” beyond the exemptions already given to Canada and Mexico. Retaliation by Europe and others should also be limited. Neither would broader protectionist action against China regarding intellectual property spark an aggressive response.

On emerging markets, the firm remains mildly optimistic, but is aware of growth slowing due to deteriorating demographics, political risks, and protectionist sentiment.

 

New Neutral Intact?

Immediately following the financial crisis, PIMCO propounded a “New Normal” or “New Neutral” thesis arguing (correctly) that subsequent growth would be tepid and interest rates would be low. The firm relied on an influential book from economists Ken Rogoff and Carmen Reinhart called This Time It’s Different, a historical examination of debt crises that claimed past crises tended to slow future growth until the debt was worked off.

Currently, the firm thinks the thesis is intact because of all the debt that’s still accumulated and the need for economies to keep rates low in order to maintain growth. But PIMCO is slightly less certain about its view that rates must remain as low as they’ve been. Demographics influencing the new normal have not changed, however, and the firm doesn’t think tax cuts in the U.S will spur meaningful long-term growth. Fels and Balls write that while there is some risk to rising yields, “we do not think that we are at the start of a secular bear market for bonds.” The authors add that there is a good chance that there will be a recession over the next 3-5 years, and that there will be “limited capacity for conventional monetary policy, compared with historical experience” at that time.

 

Investment Implications And Portfolio Positioning

As a consequence of this analysis, PIMCO is avoiding big macroeconomic bets currently. The firm maintains “modest duration underweights,” including in Japan. The firm is also mildly overweight in TIPS. PIMCO tends to avoid generic corporate bonds, and gets its corporate exposure from short-dated structured products. The firm also likes some non-agency mortgages currently. The firm prefers to get exposure to emerging markets through currencies rather through bonds at the moment. Currencies are “the best way to express a positive view on EM fundamentals and to generate income.” PIMCO is neutral on U.S. stocks, but likes Japan, as it anticipates earnings growth there. Finally, the firm is modestly overweight in commodities – especially energy and base metals — “due to their stand-alone return prospects and their potential diversification benefits should the global economy accelerate, elevating realized inflation.”

 

Outlook for Major Economies

For the U.S., PIMCO expects above-trend real GDP growth in the 2.25% to 2.75% range in 2018. Low unemployment should continue, putting some pressure on wage growth and consumer price inflation. The Fed will gradually push rates higher under new leadership, making progress toward the 2% objective.

Growth momentum is strong and financial conditions are favorable in the eurozone. GDP growth should be between 2.25% and 2.75% for the year. The eurozone recovery is now broader than it has been in the past. Inflation and wage pressure are down, however, because of remaining labor slack and “persistent competitiveness gaps among member states.” PIMCO doesn’t anticipate a rate hike from the ECB until mid-2019.

In the U.K., PIMCO expects 1.5%-2% real GDP growth in 2018. Growth should pick up with progress toward separation from the EU. The Bank of England should hike rates twice unless Brexit talks break down.

PIMCO’s base case for Japan is a continuation of growth in a 1%-1.5% range. With an unemployment rate below 3%, wage growth should pick up, helping core inflation to rise to slightly below 1%.

Finally, PIMCO expects a “controlled deceleration” of China’s GDP growth toward around 6%-7%. Inflation should accelerate on a core basis and from higher oil prices. This should encourage the People’s Bank of China to hike rates. PIMCO is neutral on China’s currency, and expects China to control capital flows to damp exchange rate volatility.