Fed Chair Jerome Powell, the nation's most powerful economic policy maker and spokesman, is making unusually bullish forecasts for U.S. longterm economic growth -- in sharp contrast to several big investors and economists on Wall Street who see a very real risk of an economic slowdown and bear market. Some see parallels to the Great Depression of the 1930s in today's economy. Several say the Fed's plan to sharply boost interest rates could drive the U.S. into a recession. An escalating global trade war also could spark a downturn.
By contrast, the Fed is forecasting that the economy, which posted GDP growth of 4.2% in the latest quarter, will keep on surging. "Since 1950, the U.S. economy has experienced periods of low, stable inflation and periods of very low unemployment, but never both for such an extended time as is seen in these forecasts," Powell says, according to CNBC. This is creating "a remarkably positive outlook," he says. Charles Evans, president of the Chicago Fed, agrees. "The U.S. economy is doing extremely well. Fundamentals are strong, the labor market is doing terrific."
The Economy Looks Robust Short Term
|4.2% GDP Growth Q2|
|4% GDP Expected for Q4|
|3.9% Jobless Rate|
|High Consumer Confidence|
What These Clashing Views Mean For Investors
These divergent views reflect the debate taking place on Wall Street regarding how long the economic expansion and bull market will last, and whether it will end in a collapse and steep recession as happened after the 2008 financial crisis. The skeptics include Bridgewater Associates founder Ray Dalio, Bleakley Advisory Group’s Peter Boockvar, billionaire investor Stanley Druckenmiller, and Bank of America Merrill Lynch U.S. Economist Michelle Meyer.
Bank of America's Meyer has expressed concern that an escalating trade war will thrust the U.S. into a "an outright recession." "Our calculations suggest that a major trade war would lead to a significant reduction in growth," she told investors in June, according to CNBC. Since then, America's tariff war with China has escalated. And despite the 4.2% second-quarter growth, asset manager Oppenheimer believes the global economy has already passed a turning point as a broad-based slowdown in economic activity has begun to set in. According to the firm’s leading indicators, the U.S. economy is beginning to experience a deceleration in growth currently being experienced by Europe and emerging markets. (To read more, see: The Economy Is Flashing Warning Signs To Investors).
Given Powell’s diagnosis of a strong economy and comments that the Fed’s current monetary policy is “still accommodative,” investors like Bridgewater's Dalio say the central bank's increasingly restrictive monetary policy will cause the next recession, per comments in Business Insider. While the next recession may not happen for two years, Dalio sees troubling parallels to the Great Depression of the 1930s, during which slashing interest rates to near zero created a huge wealth divide in the nation.
Bleakley Advisory's Boockvar also cites rising rates as a potential catalyst for the next recession. "What worries me going into next year is that it's not just the Fed," he says. He notes the European Central Bank also will start to end easing by yearend and the Bank of Japan is also becoming less accommodative. (To read more, see: The Stock Market Is About to Turn Ugly for Investors: Shiller).
Billionaire Druckenmiller agrees. "With the monetary tightening, we're kind of at that stage of the cycle where the bombs are going off," he said, per Business Insider. Once easy money dries up, Druckenmiller says, all bets are off for investors and a market collapse may follow.
To get more clues about the economy's future, investors will have to keep tabs on a broad range of indicators including the third quarter GDP numbers, consumer confidence and the pace of employment growth in the U.S. Strong GDP numbers may calm the fears of many investors. But any sign of weakness could cause a major pullback in the stock market.