Global growth remains strong with the latest IMF forecast showing an increase to 3.82% for this year up from 3.65% in 2017, before strengthening to 3.93% in 2019. Growth in the United States is expected to be strong too, at least according to the IMF, with only a marginal decline to 2.78% from 2.86%. So what’s to worry about?
Potentially there is nothing to worry about, but as bond investors we are always worrying about something. At Stratton Street we have a chart pack which includes some of the “canaries in the coalmine” that might be acting as early warning signs of a future economic slowdown. There are not many slides in this pack, but one that has been showing a clear downward trend is US housing. Existing home sales have declined for six consecutive months, and housing starts are showing signs of stabilising, albeit at a much higher level than we saw in the aftermath of the last recession.
There are two things worth noting here, firstly it should not be too surprising that housing demand would decline as rates rise given the link to mortgage costs. This is particularly true when yields at the long end start to rise, given most US mortgages are fixed off long-term rates, rather than being fixed to short rates as is the case in the UK.
Secondly, the current level of US housing starts of 1.268 million has only just RISEN TO the level that housing starts DECLINED TO in 6 of the last 8 recessions since 1960 and considerably below the roughly 1.6 million level that existed immediately prior to the recessions in 1973 and 2001. We will obviously be keeping a very close eye on housing data over the next few months.
In our view, the housing data is not quite as surprising as it may first appear. Our research suggests that economic growth and inflation are very closely tied to population growth, particularly the growth in working age population. As the number of people of working age starts to decline, demand for housing would also be likely to decline as well. So it is worth pointing out that the latest figures for the growth in the US working age population currently stands at zero. Under those circumstances, it seems highly unlikely that demand for housing will start to increase any time soon.