This week’s chart explains why weaker-than-expected Q3 forecasts shouldn’t stoke recession fears, but may spur reconsideration of income and growth sources.
October 4, 2019 | 1 minute read
A fresh batch of weaker-than-expected economic releases this week reignited investors’ long-running recession fears and likely paved the way for a third rate cut at the Fed’s October meeting.
U.S. economic growth indeed slowed in Q2 and is expected to maintain its slow pace in Q3. The NY Fed’s Nowcast sees GDP growth of 2.1% for Q3 2019 while the Atlanta Fed’s GDPNow projects just 1.8%. Each of these two quarters would represent slower growth than in eight of the previous nine quarters.
Despite the recent slowdown, it’s important to keep in mind that GDP growth has spent most of the past two years running well above its long-term potential, fueled by tax cuts and fiscal stimulus measures.
According to researchers at the San Francisco Fed, the normal (long-term) pace for GDP growth today sits somewhere between 1.5% and 1.75% compared to 3% or higher from 1987–2007.1 They attribute the deceleration to a mix of slow labor force growth in the U.S. along with a significant decline in labor productivity.1
Against this backdrop, a move toward lower economic growth doesn’t necessarily represent a decline into recession. Instead, it could simply reflect economic growth settling into a slower but more sustainable growth rate. However, investors may still need to reconsider where they will find sources of income and growth within such an environment.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
