Perspectives

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EcoPerspectives // 1st quarter 2019  
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economic-research.bnpparibas.com  
United-States  
Landing  
The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption  
created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the  
deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has  
adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.  
The wind has turned in the US and, as is often the case in the  
1
- Growth and inflation  
world’s biggest market economy, it was the stock market that  
proved to be the weathervane. Over the final three months of 2018,  
equity prices fell by 15%; whilst not a crash, this is a serious  
correction, which anticipates a likely normalisation of company  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2
.9  
1
earnings .  
2
.4  
2
.2  
2
.1  
2.1  
2
.0  
Blowback  
1.8  
19  
1.6  
1
.5  
1
.3  
There is little here that is surprising. With the effect of tax cuts  
waning, President Trump’s trade war is claiming its first victims  
among US companies. In December 2018, the index of new  
industrial orders lost 11 points, registering its biggest fall since that  
triggered by the collapse of Lehman Brothers a little over ten years  
ago (Chart 2). In the industrial and exporting region of Philadelphia,  
the Fed’s surveys suggest that expectations are less favourable.  
16  
17  
18  
19  
20  
16  
17  
18  
20  
Source: National accounts, BNP Paribas  
2
2 - A sudden chill  
With the price of oil dropping 25% , the energy sector is also feeling  
the pain. Highly leveraged, it is seeing tougher financing conditions  
Purchasing Managers Index (manufacturing sector)  
Total▪▪▪ Order intake  
(
its risk premium is widening) and equity valuations falling. The  
immediate effects have been brakes on investment and production  
of oil and gas from fracking, which had set new records in 2018;  
these will be viewed differently depending on the importance one  
places on energy transition (see our article on page 24).  
7
0
65  
6
0
5
As mortgage rates rise, the real estate sector declines. The National  
Association of Home Builders (NAHB) index has lost ground,  
auguring over time a fall in housing starts and a correction in prices.  
Support will not come from the federal government, which,  
unhelpfully, is under a partial shutdown (see Box). This shutdown is  
already the longest ever, and will trim between USD5 billion and  
5
50  
45  
2011 2012 2013 2014 2015 2016 2017 2018 2019  
3
USD10 billion off economic activity each week ; its effects were not  
Source: Institute for Supply Management  
particularly visible at the end of 2018 but will be felt in the first  
quarter of 2019, when growth (at an annualised rate) will be trimmed  
by nearly one point.  
A change in tone from the Fed  
Having made nine successive increases in the fed funds rate, taking  
it to 2.50% (upper limit), the Federal Reserve is now hinting at a  
pause. Even before the shutdown, members of the Open Markets  
Committee had tempered their economic diagnosis and their  
estimates of interest rate increases. Minutes from their last meeting  
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Between 20 September 2018 (the last peak) and 31 December 2018, the  
Standard & Poor’s 500 index fell 14.5%; over the same period, analysts  
downgraded their estimates of earnings per share.  
(
on 12 December 2018) suggest a cautious and watchful position,  
faced with feedback from business leaders in the field and  
2
On 16 January 2019, a barrel of Brent crude oil cost USD61, 25% below its  
previous peak at the beginning of October 2018.  
3
Range of estimates based on the cost of the shutdown in the autumn of 2013.  
See: Committee for A Responsible Federal Budget (2013), The Economic Cost  
of the Shutdown, October.  
EcoPerspectives // 1st quarter 2019  
4
economic-research.bnpparibas.com  
imponderables such as Brexit, which the Fed has indicated it is  
following closely .  
3
- Flattening out  
4
3-month forward rates  
10-year to 2-year spread (Treasuries)  
Shaded areas show recessions  
3%  
This change of tone has had its effects on the markets; for 2019 the  
forward yield curves suggest no monetary tightening but rather a  
status quo, or even a slight relaxation; in the sovereign bond  
segment, yields have fallen whilst the distribution across maturities  
has become nearly flat (Chart 3).  
16/01/19 ▪▪▪ 09/11/18  
3,4%  
3,2%  
3,0%  
2,8%  
2,6%  
2,4%  
2
%
%
1
In the past, such a pattern has always presaged a slowdown in the  
US economy, and it is unlikely that this time will be any different.  
The flattening of the yield curve increases the carrying cost of debts  
and contributes to the inversion of the leverage effect, something  
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that the US has made significant use of in recent years . For a  
-1%  
number of quarters now, the International Monetary Fund (IMF) has  
warned of increasing vulnerability of certain sectors of the economy  
M
a
r
c
h
 1 9  
M
a
rc
h
2
0
1981 1989  
2000 2007  
2019  
Source: Thomson Reuters, US BEA  
such as energy, infrastructure, healthcare and telecommunications  
6
(
IMF, 2018) . The IMF indicates that the latest wave of corporate  
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- The longest shutdown in history  
debt issuance not only set new records, but also carries the greatest  
risk. In 2018, 80% of issues subscribed by institutional investors  
Although it is far from the first of its kind, the current partial shutdown  
of the US federal government, which began on 22 December 2018,  
has set a new record for duration: at 27 days and counting on 17  
January, it by far exceeds the 21-day shutdown under Bill Clinton at  
the end of 1995 and early 1996, let alone the average duration of 8  
days. And at the time of writing, there is no end in sight, with the  
question of financing the wall that Mr Trump wants to build on the  
border with Mexico, the cause of the shutdown, still unresolved. The  
White House seems ready for the stalemate to continue at least until  
the State of the Union address, planned for 29 January. And we can  
not rule out the risk of a second shutdown later this year, at the time  
of the renegotiation of the debt ceiling, expected in September.  
(
mutual or pension funds, insurance companies, etc.) were  
‘covenant lite’, that is to say virtually without any guarantee. Half of  
leveraged lending was issued at multiples of at least five times  
annual operating income.  
A widening trade deficit  
Some USD45 billion in additional import tariffs have been applied  
since 2018; the US administration could go even further in 2019. On  
17 February, the Department of Commerce will deliver its  
conclusions on the “threat to national security” represented by  
vehicles manufactured in the European Union, potentially opening  
the way to additional tariffs. On 1 March, tariffs on Chinese goods  
could be raised further. To what effect?  
The negative effects on the economy come mainly from the knock-on  
effects of the immediate income shock for hundreds of thousands of  
civil servants required to work unpaid, on compulsory unpaid leave  
from services that are closed altogether, contract workers,  
subcontractors and those receiving social benefits, the payment of  
which could be under threat. The shutdown will cost between 0.1 to  
The tenuous link between tariffs and the trade balance has already  
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been discussed on these pages . And indeed, the increase in tariffs  
has, so far, done nothing to reduce the trade deficit. Quite the  
opposite; the trade deficit excluding oil widened over the final  
months of 2018. The 12 months cumulated deficit in October was  
USD800 billion, a record high. Ironically, the biggest increase came  
in the deficit with China, the country hit the hardest by far by new  
tariffs. Might this fact dissuade President Trump from going further  
in his trade war? One might hope so; but hope may not be enough.  
0
.2 of annualised quarterly growth per week. If it were to last  
throughout the first quarter, growth would be cut to zero. As a  
shutdown continues, its negative effects increase in a non-linear  
fashion. A significant part of the lost growth will, however, be made  
up in subsequent quarters thanks to employees receiving back pay.  
Employment data will also see a temporary impact.  
The shutdown also interrupts the publication of data from the BEA  
and the Census Bureau (GDP, retail sales, consumer spending,  
durable goods orders, housing starts and building permits, new home  
sales), although not those from the BLS (employment and prices). As  
a result, the Fed will not have the usual range of statistical  
information available to it at its meeting at end-January nor, perhaps,  
that on 19-20 March.  
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Federal Open Market Committee (2018), Minutes, 18-19 December.  
Proutat J.L., (2017), Is the US economy at a cyclical peak?, BNP Paribas  
5
EcoFlash, June.  
6
Adrian T., Natalucci F., Piontek T. (2018), Sounding the Alarm on Leveraged  
Lending, IMFBlog, November 15.  
7
rd  
BNP Paribas EcoPerspectives, 3 quarter 2018.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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