Backlog Logjam Signals Middle Innings

The Atlanta Fed estimates a whopping 4.7% GDP growth in the 2nd quarter of 2018 and ISM manufacturing backlogs are near three-decade highs. The current order backlog logjam and extreme small business optimism we highlighted last week resemble the record levels of 2004, signifying that we may be in the middle innings of this expansion cycle.

Late cycle fears of record high housing prices and record buyout valuations are a worrisome outcome of too much money chasing too few goods in a classic cost-push inflation phase. So far the mismatch of capital, labor, and assets have not elevated credit risk to warning levels typical of the final innings of a ballgame. With banking credit spreads (3-month Libor – TBill spread) in the low-risk zone and all consumer loan categories near 10-year lows, it remains premature to expect economic trouble on the current horizon.

Global trade continues to be the primary wildcard in 2018 that remains a doubled edged sword. An actual trade war with sharply higher tariffs globally would lead to higher inflation, interest rates, and a lower stock market outcome. A positive trade resolution with China and Europe would reinvigorate global growth. However, the US is an anomaly of accelerating growth since Trump’s enormous adrenaline injected into the economy with Corporate tax cuts, deregulation, and a pro-business sentiment boost. The appearance of overcoming the global economic slowdown apparent in Asia and Europe with an enormous trade deficit has given Trump confidence in his America First game plan. Until the Goldilocks economy in the US feels the pain of global slowing and trade tensions, Trump may continue this poker game indefinitely while the cards are in his favor and the US outperforms the world.

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