Speaker: New Recession Could Come in 5-7 Years

By:
Chris Gaetano
Published Date:
Oct 19, 2017
Globe on money

Lester Wigler, a senior portfolio manager and financial adviser with Morgan Stanley, said that a number of financial indices show that the global economy is still growing, so don't worry about a worldwide recession in the next three to five years. The next five to seven years, though, are another story. 

Speaking at the Foundation for Accounting Education's Oct. 18 Business and Industry Conference, Wigler said that global gross domestic product (GDP) increased at a rate of 3.1 percent from January to December 2016 , and that the expected figure for 2017 is 3.6 percent. What's more, this growth rate will be a function of all geographic sectors with the exception of the United Kingdom, due to the lingering impacts of its exit from the European Union. Much of that growth, though, will come from China and from developing markets, which together account for one-third of all global GDP, compared to the United States' one-fourth.

He said these figures were not pulled out of the air. One way growth expectations are measured is through the global Purchasing Managers Index (PMI), which consists of five indicators: the level of new orders, inventory levels, production levels, supply deliveries and employment environment. When the index is over 50, this indicates an expanding economy, and when it is under 50 it indicates a shrinking economy. As of June 2017, he said, the entire world is in a strong to moderate expansion. 

He said the Morgan Stanley Cycle Index, which measures deviation from historical norms based on macro factors like yield curves, also indicates that we can expect growth to continue. This is because post-recession economies tend to follow a series of stages. The first is the repair phase, when things first begin improving. Then there's recovery, where there's enough improvements for the economy to start breaking even at zero. Finally, there's expansion, where the economy goes past zero and comes out stronger than it was before. Given the Morgan Stanley Cycle Index, according to Wigler, the global economy is still in the expansion phase. 

"What we're getting from these charts is that there is generally very little indication of imminent recession in the U.S., Japan or the Euro area. We've got signs we're in the latter stages of the expansion part of the economic cycle. ... [A recession] is not something we see in the short term, in the three- to five-year time span," he said. 

But while there is no trouble on the horizon, it might be brewing beyond it. Wigler said that business activity does seem to be on the decline, at least when looking at the Global Trade Leading Indicator. This index is meant to forecast global trade dynamics about a month in advance. It is based on oil and other commodity prices, shipping rates, U.S. dollars, and surveys of purchasing manager and business sentiment. He said the most recent complete reversion occurred from November 2012 to February 2016, anticipating rising activity. However, Wigler believes that the current situation backs up projections that the global economy is now in the tail end of its expansionary cycle, which means a recession may be coming five to seven years from now. This, he said, would be in line with historical trends. 

"We're in the latter parts of the current expansion. There are regular time intervals between recessions, ... and I did research further back. I went back to 1930, and I can say definitively that there has never been a period greater than 10 years between recessions. Like, never, at least as far back as 1930," he said. 

He asked his audience to consider that the last recession began easing up around 2010. He said that people should be cautious as we enter 2020. He predicted that for companies that provide goods and services, pricing power will be very weak, and so it will be a good idea to focus on sales based on volume. 

More immediately, though, he anticipates that growth will continue for at least the next few years, partially because of easy access to financing. While the U.S. Federal Reserve has been looking to raise rates, he noted that the European Central Bank and the Central Bank of Japan look as though they will keep rates low. This means the U.S. Fed's moves will likely not have much impact on how easy it is to get credit. 

Trump Moves Add Uncertainty 

Wigler said that the Trump administration might be a wrench in the works, as it has made several sweeping proposals that may or may not get done, and even if a proposal is implemented, it can be hard to predict specific impacts. For instance, he said that one thing the administration wants to do is get cash being held outside the United States by companies like Apple or Facebook back into the country. While Wigler said these companies would probably start making more domestic investments if this were to happen, they could also decide just to spend the money on share buybacks, which he said he hopes does not happen. 

But while specifics might be hard to determine, Wigler also said that he thought rolling back Dodd-Frank rules and reforming the corporate tax structure, both of which the administration said they would implement one day, would be positive steps for the U.S. economy. 

"I think it's reasonable to expect that, if there is some sort of a lowering, if their rates go down, that it will be good for corporations, [and] if there are [fewer] regulations in the financial services industry, that will facilitate additional activity that banks can use to support [the] companies they want to," he said. 

It is uncertain, however, whether tax reform will pass. Wigler said that if it fails, "that may be a motivation for a correction" in equities markets on the order of 2 to 3 percent. This correction, though, would be very short lived because the markets are not anticipating it happening anytime soon. 

"It would be great if we could get tax reform, but I'm not betting the farm it's happening. I believe that is the current perception. Since there's optimism that something might get through built into increasingly overrated valuations, I believe there will be a correction if the program fails, for sure," he said. 

Wigler also talked about the administration's current efforts regarding the Affordable Care Act, particularly the end of the insurance subsidies undergirding much of its infrastructure. He said that the Alexander-Murray bill that would keep things stable for at least a little while, but that it still doesn't address the issue of drug pricing. Drawing from his experience as a former pharmaceutical industry consultant, he said that if the government could find a way to lower drug prices then, contrary to initial perceptions, it would actually be good for the pharmaceutical industry. While pharmaceutical companies do plenty of in-house R&D, Wigler said they are increasingly turning to outside firms that they can just buy, along with all their own research. 

"I think if there's controls of drug prices, that will make this activity even more intense and, on a volume basis, it might be good for pharmaceuticals. [I] slightly disagree it might be a negative," he said. 

As far as where things will be for consumer staples, Wigler said much will depend on how renegotiations go for the North American Free Trade Agreement. He said he believed that free trade enables lower prices on good and services, and so if the country goes in a more protectionist direction as the administration has indicated, he expects these prices to rise. However, he also said that the actual renegotiation process behind NAFTA is much more prosaic than the rhetoric would indicate. In truth, according to Wigler, people have been calling for a NAFTA renegotiation for years, and even he, a dedicated free-trader, has no doubt that this 30-year-old agreement needs revision. 

"We really have to make improvements to NAFTA, we do need a renegotiation, we can't just let it sit there," he said. 

While it would appear that the talks have been difficult, with the United States. presenting several non-starters to Mexico and Canada, the renegotiation process is still happening, just a little more quietly than before. 

"The rhetoric is one thing: We are not free traders anymore. America First, that's the rhetoric. The actual behavior is something different," he said. 

From talks he's had with people in Washington, D.C. and New York City who are more actively involved with the legislative process, people are "just sort of hunkering down and doing their jobs" with the knowledge that there's an historic opportunity to position the U.S. market for fantastic growth: The world economic is at very low volatility levels, and the whole world is doing well economically. Overall, he does not think there's much to fear about the rhetoric becoming the reality. 
 
Of course, he noted that for all the talk about continued growth in the global economy, "at least half the country does not view anything I've said as really true." While macro-level indicators may show improvements, this has not translated into positive changes in the day-to-day life of many people in the United States. This is because growth does not necessarily translate into what he said was velocity: the frequency at which one unit of currency is used to purchase domestically produced goods within a given time period. While there's more money in the economy, he said it has mostly been used to buy either imported goods and services or financial assets, neither of which contribute to velocity. Thus, record-high stock market indices coexist with "this general feeling that things aren't getting better, the lifestyle isn't getting better." 

"When money is available, it goes into financial assets, and the people able to put money into financial assets are people who can afford to put money into financial assets," he said, meaning that those who can do so tend to already be in comfortable economic positions. "And when money is put into financial assets, it makes those people feel even richer, and the net result is it exacerbates feelings of inequality between people who have money and people who don't," he said. 

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