There are no real signs of a recession in 2019, but Doubleline CEO Jeffrey Gundlach and his colleagues keep looking for ones on the horizon like hawks.
Since the current expansion began in 2009, real GDP growth has been "remarkably stable," fluctuating in a band between 1.25 percent and 3 percent, the bond fund manager said Tuesday on a webcast. The low points in economic growth during this cycle typically have been tied to fears of a deflation outbreak. The last time this happened was in early 2016.
So one question Gundlach asked is when the economy breaks out of this band, will it be to the upside or the downside? He didn't offer an answer but did say the economy could "see a recession in 2019. I'm not predicting it."
What is remarkable is the weakness of the current economic expansion and the previous one that ended in 2007. Since its 2009 trough, GDP is 21.8 percent higher today than it was nine years ago. The 2001-2007 expansion was even more paltry, as economic activity climbed only 18 percent. This contrasts sharply with the expansion ending in 2001, when GDP grew 42.6 percent, and the boom ending in 1990, when GDP advanced 38.4 percent.
The Leading Economic Indicators (LEI) are "still healthy," Gundlach said, although they are showing a bit of a "downtick," though hardly enough to signal a recession. Before recessions, the LEI usually turns negative several months to a year before the downturn actually starts.
What has caught Gundlach's attention is certain soft data indicators have returned to where they were before the 2016 election. Areas of weakness include retail sales and consumer credit.
Data isn't pointing to a slowdown but it isn't pointing to the boomlet many have expected following the passage of the tax bill either. Three months ago, the Atlanta Federal Reserve Bank's widely watched GDP Now forecast was predicting first quarter GDP would come in at 4.0 percent—it had just lowered that forecast from 5.4 percent. When the actual number was announced in April, it was 2.3 percent the same rate as it was for all of 2017—and the average rate from 2012 through 2016.
Today, the Atlanta Fed's model calls for second-quarter GDP to grow at 4.0 percent. If it were a bet, Gundlach said he'd take the under as the model always starts out high in recent times.
Meanwhile, a whiff of inflation suddenly is a possibility. Were the core CPI to rise much above 2.25 percent, the "entire inflation narrative is going to change," Gundlach said. The Fed could say, "Houston, we have a problem." Over the past 20 years, the highest core CPI has been 3.0 percent, so if it were to pierce that level, it would represent a major breakout.
Gundlach quickly added that he was not predicting this would happen. In fact, the bond fund manager known for his bold, confident predictions, acknowledged he was uncertain about the direction of many financial assets.