Trump says U.S. has the world's "hottest" economy — he's way off

By Irina Ivanova

/ MoneyWatch

Trump touts strong economy

In his State of the Union address, President Donald Trump made a big claim about recent economic growth, extolling the U.S. for having "far and away the hottest economy anywhere in the world."

True, America's economy is strong. But not only is it not the world's hottest — China, India and a host of other developing nations are growing faster — it's already significantly cooler than it was just six months ago.

That doesn't mean the country is about to plunge into recession. Most private economists and the Federal Reserve expect the economy to grow at a rate above 2 percent this year. But increasingly, signs are telling workers and investors they shouldn't wait for the expansion to move any faster. Here are the indicators that it has already slowed down.

Unemployment is off record lows

While job creation remains strong, "we are beginning to see signs of weakness under the surface," Deutsche Bank Chief International Economist Torsten Slok said in a note.

The unemployment rate has risen from its 50-year trough of 3.7 a few months ago to 4 percent in January. The share of businesses saying they couldn't find anyone to hire has stopped rising, and wages last month grew more slowly than expected.

Unemployment for black and Latino workers has also ticked up in recent months because fewer of them were employed in January. Bill Spriggs, chief economist for the AFL-CIO, noted that unemployment for people of color has often been "the canary in the coal mine" for other economic slowdowns.

unemployment-race.png

Company earnings are lower

Last year, businesses had the boost of a tax cut to juice up their profits. This year, they're less fortunate.

Across the S&P 500, analysts are forecasting earnings per share to drop 1.8 percent in the first quarter from a year earlier, the Associated Press reports. Just a few weeks ago, they were predicting higher earnings. If the updated forecasts prove true, it will be the first earnings decline in nearly three years.

Lower profits this quarter are one element that pulled stocks lower on Thursday.

The yield curve

A favorite tool of economists — and generally ignored by everyone else — the yield curve has a remarkable track record of predicting when a recession is approaching.

Here's what it means. The yield curve plots out the return an investor earns on a particular Treasury bond. Because Treasurys are essentially loans backed by the U.S. economy, the size of the return is seen as one proxy of U.S. economic growth.

Typically, the longer the duration of the bond, the higher its yield, reflecting the risk to investors of tying up money for longer periods of time.

Starting in December, however, the yields for some short-term bonds rose above those for long-term bonds. When this happens, it's an indicator that the economy is slowing. An "inversion" of the yield for the two-year and 10-year Treasury has preceded every recession since World War II.

yield-curve-comparison.png

Manufactured pains

The diminishing growth in some countries abroad is reverberating in U.S. factories. "The sharp slowdown in China, independent of the hit from the trade war, is depressing manufacturing in the U.S. and elsewhere," Pantheon Macroeconomics said in a note.

Advance orders for durable goods — big-ticket items like cars and appliances — are growing more slowly this year than in 2018, the latest data show.

But a cooling economy is different from one that's frozen over. The U.S. has a bit more growth left in it, most economists say, even though it may not be at the rapid pace of the last year.

Wrote UBS analysts in a note: "While the US economy is slowing, we don't think it will contract in the next 12 months and expect 2.4 percent growth this year and 2 percent next year."

First published on February 7, 2019

© 2019 CBS Interactive Inc.. All Rights Reserved.

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