Banking & Finance and Economic Development

Commerce Bank exec urges investors to ‘look forward’

Chief economist adjusts expectation for global growth this year down to 2.9%.

October 25, 2019
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A bank’s chief economist stopped in Grand Rapids this month to review the current economic expansion, the rising risk of a U.S. recession and the ongoing impact of the trade war with China.

Scott Colbert, senior vice president and chief economist at Kansas City, Missouri-based Commerce Bank — which has a West Michigan office — spoke to a gathering of investors and executives at the Amway Grand Plaza Hotel on Oct. 18.

Colbert said although U.S. growth is slowing after a more than 42-quarter expansion, “the recovery has been so slow and gradual, we haven’t created the heat” of high inflation that would push the Federal Reserve to push back and raise interest rates, one factor that signals a recession.

The economy also would need to experience a big “shock” to cause a recession, Colbert said.

“It might be the trade war is that type of thing,” he said. But during the current 10½-year expansion, he noted the world has already faced bigger crises, including the debt crisis in Europe beginning in 2010, the 2015-16 oil glut that led to an energy crisis and Brexit.

The International Monetary Fund (IMF) projects global growth will slow to 3.3% this year, down from 3.6% in 2018.

Colbert said he believes this projection is too optimistic and said Commerce Bank estimates growth will slow to 2.9%.

Once leading economic indicators such as interest rates, the stock market and jobs numbers recover, as they did back in March 2017, Colbert said the economy has, statistically on average, six years until the next recession, which would mean the economy could slip into recession by February 2023, if not before.

He added the inversion of the yield curve is 9 for 9 in predicting the last few recessions, and the inversion in August points toward another slip ahead, though nothing like the Great Recession.

“To have a recession, two things have to happen: an anxiety shock, plus a Federal Reserve that is braking to control inflation,” he said, noting that the Fed is currently doing the opposite by cutting rates, which it hopes will extend the economic recovery by steepening the yield curve.

Colbert said in living memory, anxiety shocks have included the Arab oil war of 1974, which quadrupled the price of oil overnight; the 1979 wage-price spiral; the first Iraq war in 1990; the dotcom bubble bursting in 2000; and the housing crisis of 2008. In every case, the Fed raised rates in response to inflation.

He said there is no definitive way to know what the next anxiety shocks will be, but they could theoretically include a continued trade war with China, a collapse in commercial property prices or the bankruptcy of China if it continues to borrow too much money from the U.S.

It’s been a good year for the stock market, which is up 20%, and the bond market, which is up 8%, Colbert said, but he cautions investors to look to the future and not to get too greedy.

He said a good alternative investment to round out a portfolio for now is the Vanguard Emerging Markets Stock Index Fund, which has a dividend yield of 3%, about 50% higher than S&P 500 returns, with valuations that are about half the S&P 500’s.

He added that from a banking perspective, there are many positive indicators still in play, including “lack of charge-offs, lots of money, a healthy financial system, jobs that are still growing (and) a Federal Reserve that’s lowering interest rates.”

“Don’t look backward; look forward,” he said.

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