CUYAHOGA FALLS, Ohio—After 11 years of economic expansion in the U.S., some people are starting to get antsy about a recession.
Roger Tutterow, a professor of economics at Kennesaw State University, alleviated some of those concerns with his presentation at the 2019 Hose Manufacturers Conference, held Nov. 12-13 in Cuyahoga Falls, Ohio.
While he said there still is about a one in three chance of a recession, he added that, despite a slowing economy, a recession is not the most likely trajectory in the near term.
"I don't think economic expansions die of old age," Tutterow said. "I think economic expansions die because of bad policy. Because of asset levels that build and pop, because of an over-accumulation of inventories and because of a portfolio of what we economists call exogenous shocks—terrorist attacks, oil embargoes and military excursions. Things that we, quite candidly, can't forecast."
Tutterow added that looking solely at gross domestic product doesn't tell the whole story for the U.S. economy in 2019 because sometimes industries produce more than they sell, which leads to inventories. And when those same industries sell more than they produce, those extra sales are generated from inventories.
"Remember, when you look at economic data, make sure you understand what it's measuring and how it's put together," Tutterow said. "When I'm trying to get my arms around how we, as a nation, are doing at not just producing product, but selling it in the same quarter, I need to back out inventories."
He said that GDP grew 3.1 percent in the first quarter of 2019 and 2 percent in the second, which on the surface would indicate that the economy slowed down.
Tutterow said the 3.1 percent in the first quarter was aided by about 0.6 percent of inventory rebuild. Remove that, and the growth becomes 2.5 percent. The second quarter slowdown was accomplished despite the fact that inventories took about 0.9 percent off of the number. Tutterow said if you add that back, growth wasn't as bad as GDP indicated.
He added that while three of the four categories comprised of GDP—investment, trade and government—currently have their various degrees of uncertainty, the consumer, that all-important fourth category, has not abandoned the U.S. economy.
"What is keeping this economy afloat, what has prevented us from going into a recession in the second half of 2019, is the consumer," Tutterow said. "Main Street America has not abandoned the economy yet. If we have a recession in 2020, it will be known as the recession that we talked ourselves into. Because the media coverage about trade wars, impeachment and economic slowdown is very different than what the economic fundamentals underlying the economy say."
Still, Tutterow didn't discount the impact of trade negotiations on the U.S. economy.
"President Trump thinks America's trade deals of the past haven't been fair to American manufacturers," he said. "I'm not saying right or wrong, I'm just saying he believes it's time to hit reset on the trade deals of the past."
Tutterow said that overall free trade is a good thing for the global economy, but that assumes no other distortions are present in the system. The global economy is littered with distortions—tariffs, currency manipulation, etc.—and removing or adding one doesn't necessarily solve the overall problem.
He theorized that President Trump is concerned with rising interest rates because if the Federal Reserve were to increase them, it would place upward pressure on the dollar and in turn offset the effects of the tariffs he's using to try to level the playing field.
Either way, Tutterow said that as long as there is uncertainty on the trade front, economic investment will continue to stall.
"I do think that the uncertainty associated with trade wars are weighing on the corporate sector," Tutterow said. "Who's going to commit capital to long-term investment if they're unclear of what the rules of the game will be."
Light vehicle sales in the U.S. have leveled off since breaking the 17 million mark in 2015. While the industry has sold at least 17 million in each of the last four years, sales peaked at 17.53 million in 2016 before falling to 17.25 million in 2017 and slightly rebounding to 17.33 million in 2018.
Uncertainty surrounding the government shutdown in December 2018 led to a weak month of consumer confidence, but retail sales have since rebounded in early 2019.
For 2019, light vehicle sales in the U.S. are projected to dip below 17 million, Tutterow cited a forecast of 16.6 million. He added that most of the pent-up demand from the Great Recession of 2008 was satisfied by 2015. And even though vehicles are lasting longer, that also means they're being financed longer.
There is one caveat, however: a disproportion amount of light vehicle sales to fleets as opposed to consumers.
"So far, at least, we've done a little better in 2019 than we expected in the aggregate absorption of domestically produced motor vehicles," Tutterow said. "Here's the problem, my buddies in the industry tell me that there's a bit of a disproportionate absorption from fleet sales. If you take the fleet sales out, the American consumer probably pulled in their horns on motor vehicles more than what the headline numbers might suggest."