The U.S. economy continues to perform strongly nearly a decade into the current recovery and China appears to be bouncing back from a slowdown, but weakness in Europe is a cause for concern, a prominent business journalist told an audience at the ULI Spring Meeting in Nashville.
The growth trend for U.S. gross domestic product is still solid, said Kathleen Hays, global economics and policy editor for Bloomberg Television and Bloomberg Radio, who has covered the U.S. economy and the Federal Reserve for more than 30 years.
“The bottom line is the economy is still growing and it’s still creating jobs,” Hays said. “There are still risks out there, but as long as the players out there managing risks are doing their jobs, we’re in good shape.”
Those players include the Federal Reserve Board, which Hays predicted will be hesitant to raise interest rates unless inflation clearly begins to escalate. “I think it’s going to take a lot for the Fed to raise interest rates again,” she said, although she said there is an even possibility that it could happen.
The Fed raised interest rates three times in 2018, and the third and fourth raises—coupled with growing fear about the effects of a trade war between the Trump administration and China—rattled the financial markets and triggered a plunge in the Dow Jones Industrial Average and S&P 500 index that had many people fearing that an economic downturn was on the horizon. Since then, however, the markets have largely recovered and are near their 2018 peaks.
In January, a policy statement by the Fed omitted a key phrase saying additional gradual interest rate increases would be warranted, which had appeared in previous policy statements, Hays noted. “Instead, they said the Fed can be patient,” she said.
Though Hays told those in attendance they should not be worried about an impending downturn, audience members were not quite as confident as she. In an unscientific instant poll she conducted during the session using the ULI Events app, 65.9 percent of those in attendance said they were more worried about a possible recession than they were a year ago, while 22 percent said they were less worried, and 12.2 percent were not worried at all.
Hays said concerns about the recovery showing its age are unwarranted. A study by the San Francisco Fed branch found that from one year to the next, the risk of a recession is unrelated to the length of the expansion. “You can put that aside,” she said.
The audience was more confident about inflation, with 51.5 percent saying it is well contained, compared with 24.8 percent who worry it will rise too fast and 23.8 percent who fear deflation.
Hays described home affordability as “still good” and noted that the rates on 30-year fixed-rate mortgages have fallen since last year, though the Washington Post reported Thursday that they have begun to creep up again. When she polled the audience, 51.7 percent said they were worried about high housing prices, while 32.6 percent were concerned about a shortage of housing inventory.
Growth in China has been slowing as the country makes the transition from an export-oriented economy to one driven more by domestic consumption, similar to that in the United States, Hays said. But stimulus efforts by China’s central bank have helped stabilize the situation. If one assumes that the Trump administration and China are able to negotiate a trade deal, “I would say China is less of a risk,” she concluded.
Hays was less optimistic about Europe. Europe’s economic performance is looking “soggier,” she said, and Germany, the European Union’s biggest national economy, is heavily dependent on trade outside Europe, particularly with China.
“There’s a lot of concern about the European economy,” said Hays, who noted that the European Central Bank has few options when it comes to stimulating growth because it already is holding interest rates at negative levels. Another factor adding to nervousness over Europe is the prospect of a “hard” Brexit, in which the United Kingdom would leave the European Union without a trade deal. The British Parliament already has rejected Prime Minister Theresa May’s withdrawal proposal, as well as a series of alternatives.
The worst-case scenario, in which the U.K. leaves without a deal, could take 3.4 percentage points off the British GDP and half a percentage point off E.U. GDP, Hays said. “That’s not good at a time when Italy probably is in recession and France’s economy is slowing down,” she added.
“The concern is not just what Brexit is going to do to the U.K., but to the whole region,” Hays said. She described the negotiations as “really a mess.”
Hays, who formerly worked for CNBC, CNN, Reuters, and Investment Business Daily, in recent years has extended her coverage to include central banks in Asia.