Fed, Consumers Turn a Deaf Ear to Wall Street’s Recession Siren
Fed, Consumers Turn a Deaf Ear to Wall Street’s Recession Siren
(Bloomberg) --
Federal Reserve Chairman Jerome Powell’s disagreement with Wall Street over recession risks is backed up by data showing that much of the talk is concentrated in a few industries with big megaphones -- manufacturing and banking.
Powell has repeatedly said that the wider U.S. economy is still in a good place. He’ll likely do so again after a Fed meeting this week -- at which it is widely expected to cut interest rates for the third-straight time -- while signaling he doesn’t see grounds for much more easing.
An analysis by Prattle, a company that uses natural-language processing to analyze linguistic trends, shows that in the last few months companies in the financial services industry have been talking about recession more frequently than those in any other sector. Prattle studies public remarks by central banks and corporations, including earnings calls, speeches, regulatory filings and other communications.
Powell’s message is partly aimed at the economy’s grave dancers -- analysts who have been obsessed with recession risk in recent months. Narratives shape beliefs and beliefs guide actions. Fed officials understand that letting recession concerns spread further is a risk in itself.
“They are concerned about self-fulfilling expectations,” says Stephen Gallagher, U.S. chief economist for Societe Generale SA who forecasts a recession in the middle of 2020. “They are trying to tell CEOs that things are better than imagined.”
In some ways, it makes sense. There’s big money to be made by timing an economic cycle correctly, and Wall Street firms have hired an army of analysts to call turns.
“Wall Street loves talking about recession,” says Drew Matus, chief market strategist for MetLife Investment Management. “Once one person says there might be a recession, the next person gets asked, ‘When do you expect the recession?’”
But chatter can get woven into stories that begin to change behavior. Fed officials have good reasons to lean against the recession theme, partly because nobody is really expecting one. The majority of the more than 60 economists surveyed by Bloomberg don’t foresee two quarters of contraction between now and the end of 2020.
“Recessions don’t happen just because you feel worried,” says Rajeev Dhawan, a professor at Georgia State University who has studied business cycles for decades. “If you look at the last few recessions, we were entering slow-speed areas -- then we were shocked.”
The economy has already weathered multiple shocks and has slowed but not buckled. Recession talk escalated across the financial, industrial and technology sectors after President Donald Trump abruptly escalated the trade conflict with China on Aug. 1, Prattle’s analysis shows.
Policy uncertainty has been a major force contributing to the overall slowdown in U.S. economic momentum, analysts say. Private-sector payroll growth is slowing, manufacturing and investment spending are in a slump and there’s little clarity about risks ranging from Brexit and the U.S.-China trade conflict to flaring Middle East tensions. Chief executive officer confidence in the third quarter declined to the lowest level in about a decade, Conference Board data show.
Government data on Wednesday is expected to show U.S. economic growth slowed to a 1.6% annualized pace in the third quarter from 2% in the second quarter, according to analysts surveyed by Bloomberg. Nonfarm payroll growth is forecast to slip to 85,000 in October from 136,000 in September, though some of the decline will likely reflect the impact of thousands of striking General Motors Co. employees.
Even so, Prattle’s analysis shows that consumer-oriented sectors such as health care and consumer staples and energy are barely mentioning “recession” or similar terms.
That backs up the outlook for continued growth by U.S. central bankers who point to consumers as a source of strength. Real wages are rising, consumption is holding up, and low interest rates are supporting housing markets.
“Just because the economy is slowing doesn’t mean it has to keep on slowing,” says Neil Dutta, head of U.S. economic research at Renaissance Macro Research LLC in New York. “The recession chatter is disproportionate to the data we have in hand.”
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Catarina Saraiva in Houston at asaraiva5@bloomberg.net
To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns
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