With all the ongoing nonsense around trade policy, it is easy to overlook that the US current account balance is actually in a quite strong position, at least looked at from the perspective of business cycle stability, which is the perspective probably most relevant to investors.
The combination of a moderate and roughly stable current account deficit and a high and apparently still rising fiscal deficit means – by virtue of an unavoidable accounting identity – that the domestic private sector must be running a healthy financial surplus.
To be sure, an abrupt move towards financial surplus can be very destabilizing for an economy, as we saw in spades during the Global Financial Crisis. However, once a large surplus is achieved, recession probabilities tend to decline significantly, particularly if the economy is not prone to the more traditional source of cyclical trouble: inflationary overheating. Closely related, the persistence of a favorable financial surplus, even late into an expansion, points away from recession.
This is not a new theme. It is one that I have written quite about quite a bit since starting this service, and for a while before that too. So, in this report, I stick mostly to updating the main indicators and try to limit the background discussion on the logic of the financial balances perspective. But seen through that prism, this economic expansion still looks fairly youthful.
This is not the only thing going on. In my view, the odds of recession must now inevitably be above average, simply because the US economy is now perceived (probably correctly) to have achieved roughly full employment. Accordingly, the Fed is no longer trying to deliver pedal to the metal policy. And the trade war adds its own risk, although one that seems mostly recently to have retreated a bit.
But this issue – and the absence of major real economy imbalances generally – keep nearby recession well away from the base case.FH-191014