Mercer's head of asset allocation says US is nearing end of business cycle

13 September 2018

Rupert Watson, head of asset allocation at Mercer, stated that the US economy may be nearing the end of its boom times in a segment on Bloomberg TV. Watson expects a mild recession at the back end of 2019, into 2020.

The US economy has seen 9 years of growth since the Great Recession ended in 2009. US markets have seen bullish growth, with particularly strong US technology sector performance. However, markets – unlike technology – are cyclical, and indications point to the US being at the end of its business cycle.

For one thing, the expansion phase of the business cycle has historically lasted about five years. Furthermore, there hasn’t been any inflation, which typically means that the expansion phase is reaching into the peak segment of the business cycle. Meanwhile government debt is high, while corporate America’s net debt-to-earnings ratio is at its highest level since 2003.

According to Fortune magazine, factors like Trump’s hostility to immigration amid dwindling labor supply, his ill-informed trade war, and rising interest rates and oil prices are other drivers that could usher in the contraction phase of the business cycle.

In conversation with Bloomberg, Rupert Watson, head of asset allocation at HR consultancy Mercer, reaffirmed the creeping sentiment that the US economy may be approaching the end of its expansion phase. As part of its Wealth services practice, Mercer manages over $200 billion in investment assets.Mercer's head of asset allocation says US is nearing end of business cycleWhen asked what one’s investment strategy should look like in September, Watson answered, “I think that over the last few months, obviously, it’s all been about the trade war or at least the trade tensions between the US and most other parts of the world. The US economy continues to power ahead, US equities continue to power ahead, seemingly unaffected by any of the tensions.”

The investment expert, nonetheless, tempered that enthusiasm. “The US is, however, approaching the end of its cycle. The US economy has been growing very strongly for a little while, and unemployment is low and likely to go even lower over the next few months. Indeed, we expect unemployment to fall to 3.5% or even below 3.5% by next year. And that’s pretty much by anyone’s guess below full employment. And with inflation already pretty much at target, and likely perhaps to go a little above target, we think the Federal Reserve will keep going.”

The US Federal Reserve previously instituted a rate hike of 0.25% in June.

“And that does mean, at some point, I think the US would be due for a period of underperformance,” stated Watson. “Where that starts or when that starts, I’m not entirely certain. And of course companies like many of the tech companies are sort of slightly odd companies in that they’re not really moved around by the ups and downs of the US or global economy, but moved by slightly different forces.”

When asked if the US would see a recession before markets saw a peak in stocks, Watson replied, “It’s difficult to know and in some ways it depends on what you mean by ‘recession’ because recessions can take many different flavors. There’s the sort of gut-wrenching recession that we saw from 2007-9, and then there’s much milder ones that we’ve had in the past.”

Watson continued, “My guess is that the US economy overheats over the next 18 months or so, and that forces the Federal Reserve to raise rates above neutral to well higher than it’s priced into the market at the moment, which causes a material slowdown at the back end of 2019 into 2020.”

Mercer’s head of asset allocation, however, believes that the upcoming economic contraction will be mild. “Because the US banking system and indeed the global banking system is in fairly good shape, and indeed that other parts of the world are not towards the end of their cycles, I think that that major slowdown in the US will only be a mild recession. And ultimately, while there will be falls in equities at some point before then, I’m not expecting anything too nasty.”


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PwC: Macroeconomic, labor force, and environmental challenges ahead

15 April 2019

The world is facing risks from a host of factors: climate change is set to create long-term issues if not dealt with in a timely manner, while aging populations will impact 40 of the world’s larger economies going forward, resulting in economic and social strains. Trade disputes between the US and other economies continue, while the US also continues to borrow heavily.  

The mini-boom noted between 2016 and 2018 has ended, with 2019 set for slower global growth as the world’s second largest economy scales back expectations. US fiscal stimulus is set to fade, with a resultant decrease in growth rate, while higher interest rates – even with the Fed slowing increases – are likely to impact consumer spending.

Economic projections are routinely made by the big consulting firms, supplementing insights from government agencies and university researchers. The latest PwC "Global Economy Watch" report considers key possible changes to the global economy on the basis of projections for the year ahead.

While Trump has held off on new tariffs in the US's spat with China, he may still deploy them if nothing can be agreed upon between the world’s largest economies. PwC expects businesses to remain in a cloud of uncertainty for 2019 in regards to tariffs, with China only one battleground for future protectionism.Large global shifts as critical issues surfaceWhile the US is seeking to lower its global trade imbalance, the government continues to spend considerably more than it takes in through tax receipts. Analysis shows that the large tax cut is likely to see US government debt surpass $1 trillion annually this year, a figure last seen post-crisis in 2012. The figure will continue to grow as the deficit runs more than 5% of GDP over the coming three years. The figure is well above that of the EU28, whose deficit is around a fifth of that of the US. 

Global issues

The US is likely to face a variety of long-term threats to prosperity, according to the report. Climate change is a key area of concern, cited as one of the world’s biggest risks that could lead to profound social instability, according a recent World Economic Forum report. Devastating wildfires in California caused $400 billion in damages last year – a significant percentage of the state's GDP. 2018 was one of the world’s four hottest on record since records began in 1880, with temperatures close to 1C above long-term trends.

While a warming world is set to create considerable burdens for young people today, the older generation continues to age, with their dependence on the young set to rise significantly over the coming decade in terms of accelerated healthcare and social security spending. The firm’s analysis shows that 40 of the world’s economies will see their workforce shrink. Former Soviet bloc countries are set to have the most significant decreases in working age populations: Ukraine tops the list, followed by Bulgaria, Romania, and Lithuania. The Netherlands and Belgium however, could begin to see their workforces contract going into 2019. A declining workforce can be problematic, particularly if the workforce is also aging, as it requires that lower output is filled by higher productivity to keep economic parity.

The firm notes that the UK is set to lose it status as the fifth-largest global economy in 2019, as India – with the world’s highest population, one of the highest GDP growth figures, and one of the youngest working age populations – surpasses the UK economy. France, too, is likely to pass the UK this year, as Brexit uncertainties and a strong euro push the French economy slightly above that of Britain's.