Economist: Market roller coaster not a great economic predictor

By Brice Wallace

“Don’t worry about it too much.”

Those were the reassuring words an economist recently provided to a Salt Lake City audience for anyone worried that the stock markets are signaling a possible recession.

Dan North, chief economist for of Euler Hermes North America, said that recent market volatility likely would not portend a recession, adding that the stock markets typically are not good predictors of GDP growth or dips.{mprestriction ids="1,3"}

For example, he said, about two years ago the stock markets lost 13 percent over three months but recovered that loss in four months. The time before that, they lost 12 percent in three months and recovered that in less than a year.

“This happens all the time. This is what the stock market is all about. It’s the long gain,” North said at the 34th annual Investors Choice Conference, produced by VentureCapital.org. “You can’t worry about this too much.”

North’s comments came days after the Dow Jones industrial average dropped 1,175 points. Last month, the Dow saw swings of several hundred points.

North said the stock market lost half of its value twice in his lifetime — during the tech bubble and during the housing bubble — and “that’s when you might get a little concerned,” he said.

“But we’re talking 10 or 12 percent, and that seems to happen all the time. In fact, if you think about the stock market and its movements, it’s a pretty bad indicator of the economy, so I don’t put much stock in it in terms of predicting the economy.”

Using charts to reinforce his message, North showed how rises and falls in the S&P 500 have not always led to similar changes in U.S. GDP. For example, the market was down 27 percent in one day in 1987, but no recession followed. The largest false signal was when the stock market lost half of its value in the tech bubble, but the resulting recession was “so small, so mild, that it doesn’t even show up on the annual data,” he said.

“So, about half the time, the stock market is wrong,” North said. “It’s rolling the dice basically. It’s no better than rolling the dice in terms of predicting the economy, so don’t worry about it too much. That would be my advice at the moment.”

A better predictor of a recession lies in the Treasury yield spread. If it’s negative, it usually means a recession is coming, but it has been positive, which typically means recovery.

“If it went negative, which it won’t … it gives us three to five months’ warning of a recession, so there’s no recession coming this year, as far as we can see,” North said. “Things are going pretty well for us.”

He predicted a U.S. GDP growth rate of more than 2.6 percent this year, which is “not great” but better than the 2.1 percent growth average during the recovery. The current U.S. economy is buoyed by strong consumer confidence, which “gives people willingness to spend,” he said. Overall consumption has been below average but should rise with wage growth. North said wages should rise because there is one job open for every unemployed person — “that hasn’t happened before,” he said — as well as people having the confidence that they will find a new job if they quit their current one, and businesses are in a hiring mood.

Wage increases should hit a 20-year high, he said. A trouble spot could be that increases in wages could lead to inflation, which tends to lead to higher interest rates, which could hamper the stock market, he said.

Meanwhile, manufacturing “is doing really well,” the service sector is strong, housing is starting to rebound even if at a slow pace, and President Trump’s plans for the economy are seen as pro-growth, he added.

North noted several “structural” problems that could hurt the U.S. economy. One is that the nation needs more skilled legal immigration to meet its employment requirements. He said large numbers of immigrants educated at U.S. universities are ultimately kicked out of the country, to the detriment of the U.S.

“Go home with the education you got right here, and compete against us now,” North said of that approach. “Go home with that education and commit cybercrime against us. That is a crazy system. We’re kicking people out that we just educated here. … These are the people we should embrace with the education we just gave them instead of kick them out.”

Complicating matters is that the labor force participation rate has been falling since the Great Recession, the labor force is aging and retirees are not being replaced quickly enough, and the number of job openings are rising faster than the number of hirings. That last point suggests employers cannot find the right people for open positions, which can result in lower productivity, he said.

Still, the U.S. economy “is actually a pretty solid picture in the intermediate term,” North said.

“No recession this year, probably not in the next year,” he said. “Two-point-six percent growth [is] OK, but with some longer-term structural issues that need to be fixed.”{/mprestriction}