Remember when Nobel Laureate economist Paul Krugman made the call two and a half years ago now that global stock markets would collapse because of newly elected President Trump? The political novice and general societal delinquent would trigger a recession, Krugman wrote in The New York Times. The only thing triggered was Krugman himself and countless others who have been predicting the Apocolypse since November 2016.

About that 2020 recession, people: It’s not happening.

The earnings season is coming in healthier than people expected three weeks ago. Most companies’ earnings are coming in better than we thought,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman in New York. “We see no earnings recession coming at us. The highs in the S&P are similar to where we were in October. The economy is a bit better, interest rates are lower and the likelihood of a very aggressive Fed is remote. All of that is supportive of growth. No recession next year.”

As everyone now knows, the U.S. economy grew 3.2% in the first quarter, beating the consensus forecast. When the economy was growing at similar numbers in Trump’s first quarters in office, guys like Krugman said explained it all away as merely a by-product of the Obama Administration.

The Obama presidency must still be serving us leftovers.

Growth came thanks to tax cuts, followed by regulatory rollback, which helped some industries.

Another factor economists are considering is all that deleveraging of household balance sheets that began in earnest in the Obama years. Americans were paying off debt and not picking up much in the way of new debt. Much of that was due to the housing bubble popping in 2008.

Household debt of equivalent income was over 144% 10 years ago and is now at 99%, according to Federal Reserve data. Americans drastically cut personal spending.

“That’s about $6 trillion that has gone towards deleveraging rather than spending and driving the economy,” Clemons says. “In other words, it’s not just the Fed we need to help the economy growth. We are paying back bills, and that’s led to lower growth in the past. It restores health to the American household balance sheet, but you get little in the way of spending so a penny saved is not a penny going to corporate earnings, let’s say.”

Deleveraging has led to a relatively stable, if not unimpressive, 1.2% annualized consumer growth rate.

Even without Americans shopping with reckless abandon, the stock market made a new high for the year last week. And while the S&P 500 is a poor indicator of the true economic sentiment on Main Street, Wall Street’s confidence is telling. It tells us that big investors believe wholeheartedly that the Fed’s dovish tilt means no rate hikes this year. There was supposed to be three to four coming.

The CME FedWatch Tool is giving a 50+% probability of a rate cut at the October 2019 Fed meeting. Prudent investors won’t count on that, especially if China is still in stimulus mode and U.S. wages hold steady or push higher.

The IMF increased its forecast for China’s GDP two weeks ago to 6.3% from 6.2%.

March industrial profits in China increased 13.9% year over year to around $87 billion, according to the National Bureau of Statistics in Beijing. Too much good news could lead to less stimulus. Still, none of this looks like a recession.

Of course, it can be argued that the U.S. and China are in a late-stage economic cycle and need help. This summer will mark the tenth year of expansion for the U.S. economy. If this continues next year, Trump and the Fed would have helped the U.S. beat an economic record.

“Without the Fed’s pause, it would have been impossible for markets to rally on from a weakened fourth quarter,” says Vlad Signorelli, head of macroeconomic research firm Bretton Woods Research in Long Valley, New Jersey. “GDP would have weakened.”

The Fed’s decision to put rake hikes on hold allowed the Republican tax cuts to work there way into an economy no longer threatened by a more contractionary rate policy. Today, rate hike probabilities going into January 2020 are at zero.

Investors expect GDP to improve remain around 2.5% on a quarterly basis for the rest of the year. That’s good for wages, which the Fed is no longer hell bent on reducing. Labor markets showed signs of weakening in the fourth quarter and have since recovered. Unemployment under 4% is good for Trump's rhetoric that he is putting women, minorities and job-thirsty working class Americans back to work. All of that improves his odds of reelection in 2020, despite generally weak approval numbers.

The global economy, an economy that was supposed to fall off a cliff following the imposition of tariffs on China, seems to be in good working order. Not only is there no recession in sight here at home, but there is no recession on the horizon in China either.

Monthly Chinese PMI data gets updated on Tuesday. Investors will be looking for confirmation of the stabilization thesis in China, which will have ramifications for Asia, the world's largest consumer market.

The recession call is dead for 2020. However, last week’s GDP data did have something for everyone. It was sort of like the Mueller Report: You see what you want to see.

The bears can feast on the fact that net exports contributed 103 basis points to the headline GDP number of 3.2%. Inventories contributed 67 basis points and government spending another 41 basis points. So about half of the growth came from trade and Washington, D.C.

Originally Posted By JUSA⏩