Catalyst News

Not Your Father's (or Your Grandfather's) Inverted Yield Curve

by Catalyst Corporate | Oct 29, 2019

A decade of uninterrupted growth has put the U.S. economy in uncharted territory. And while there are several contenders that might eventually tip the expanding economy toward recession, economist Bernard Baumohl said the economy appears to have more life left – if the trade wars don’t last too long.

“We are at a pivotal moment in U.S. economic history. But let me tell you up front, the fundamentals of the U.S. economy still look pretty good,” said Baumohl, chief global economist at Economic Outlook Group, which has been recognized for its highly accurate forecasts. “Expect to see unemployment under four percent well into next year,” he predicted.

Bernard Baumohl

During his recent presentation at Catalyst Corporate’s Economic & Payments Forum, Baumohl acknowledged, despite his own optimism around the economy, an undercurrent of concern remains that a “recession isn’t just possible, it’s probable.” But he added: “It is extremely difficult for a $22 trillion, free market, highly liquid economy to actually have a recession. That’s why they are fairly rare.” 

Baumohl noted, “While the much-discussed yield curve inversion has been a great predictor of past recessions, it’s different this time. This is not your father’s or your grandfather’s yield curve inversion. This time, the yield curve occurred because of artificial factors. I do not see the yield curve inversion this time being an effective predictor of recession.”

Housing and consumers fueling growth
While growing political dissension, the current trade war, or a real shooting war erupting in a global hotspot might grind the economy to a halt, Baumohl said stalwarts such as consumers and housing continue to provide fuel for growth.

“You cannot have a vibrant economy without a really healthy housing market,” according to Baumohl, who said the total value of the U.S. housing market has reached $26 trillion (mortgage debt plus home equity).

Home equity, he said, stands at $16 trillion today, versus $6 trillion a decade ago.

But the last 10 years have seen a change in lenders. A decade after the housing crash, more heavily regulated traditional banks have stepped away from mortgage lending.

Banks’ once-dominant slice of the mortgage loan business – pegged at 69 percent in 2009 – had shrunk to about 38 percent in 2018. Interestingly, during that same 10-year span, the credit union market share of mortgage loans rose from six percent to 10 percent.

But it is the non-bank entities, such as Quicken Loans, LendingTree and PennyMac, that are seeing the most rapid growth – moving from 25 percent of the market in 2009 to around 52 percent.

The housing market, however, is beginning to feel some challenges. “Homebuilders confront a perfect storm,” Baumohl said. Not only are fewer households forming, he said the market is being held back by the trade war's effects on costs and availability of building materials and by fewer workers due to immigration limits.

Baumohl is forecasting 5.33 million home sales in 2019, slipping to 5.31 million in 2020.

But while builders may feel some pressure, consumers continue to spend. Consumers remain the “bedrock” of the economy and have kept the economy afloat, said Baumohl. Spurred on by the Internet and online shopping, “impulse buying is sustaining the economy,” he said.

“The good news is we don’t see any household financial stress,” said Baumohl.

Handouts from Baumohl’s “Housing and the U.S. Economic Outlook” presentation, as well as other Forum presentations, can be found here.