Forecaster of the Month: Economy is bouncing back, award-winning forecaster says

Seth Carpenter, chief U.S. economist at UBS

Stop worrying: The U.S. economy isn’t about to slip into a recession. In fact, the economy is now reaccelerating after the trade-induced winter freeze, according to economists at UBS, who won the Forecaster of the Month contest for June. It’s the 10th time UBS has won the monthly award from MarketWatch.

The big question in the economy these days boils down to what you think the impact of President Donald Trump’s trade wars will be.

One camp, represented by UBS chief U.S. economist Seth Carpenter and his team, believes that the tariffs are like a bump in the road, a one-time supply shock to manufacturing output and business investment that should dissipate.

“It looks like a supply shock,” UBS economist Sam Coffin says. “We are growing again. Across a lot of indicators, there are broad signs of recovery since the first quarter.”

“We are pretty optimistic,” Coffin says. However, the Fed is “coming at it from a different point of view,” Coffin said.

Buzz kill

The other camp argues that the constant threats of tariffs and trade disputes have eroded business confidence, a buzz kill that will stop companies from investing in new factories, equipment and ideas. A collapse in confidence could spiral out of control, pushing the economy over the edge into recession.

The markets are betting heavily that the Federal Reserve falls into the second camp, and that Jerome Powell and his colleagues will slash interest rates later this month to reassure businesses, unleashing their animal spirits.

UBS expects the Fed to cut rates at the end of July, “but risks to that view have increased.”

We may see which way the Fed is leaning on Wednesday, when Powell testifies to Congress about the state of the economy.

UBS economists say the hard data shows that capital spending is rebounding. Strong job growth shows that businesses remain confident in the future.

“Capital spending growth was interrupted last winter as tariffs slowed activity, but business spending on equipment and structures is now reaccelerating,” Carpenter and his team wrote in a note to clients this weekend. “Both actual business spending and employment and production sentiment point to diminished, not increased risks.”

Not to mention the stock market SPX, -0.03%  near record highs.

Healthy economy

UBS is forecasting a modest decline in gross domestic product, sinking from 3.1% in the first quarter to 2.8% in the second and 2.2% in second half of the year. Both consumer spending and business fixed investment should remain healthy in the second half of the year.

Next year, growth will drop down to about 1.8%, in line with the economy’s potential, UBS says.

UBS forecast Number as reported*
ISM 53.3% 52.1%
Nonfarm payrolls 208,000 75,000
Trade deficit -$50.8 billion -$50.8 billion
Retail sales 0.4% 0.5%
Industrial production 0.3% 0.4%
Consumer price index 0.1% 0.1%
Housing starts 1.250 million 1.269 million
Durable goods orders -1.3% -1.3%
Consumer confidence 130.0 121.5
New home sales 640,000 626,000
*Subject to revision

In the June contest, the UBS team — Carpenter, Coffin, Rob Martin, Alan Detmeister and Laura Desplans — nailed three of the 10 indicators we track: the consumer price index, the trade deficit, and durable goods orders. Their forecast for new home sales was also the most accurate among 45 forecasting teams. Their forecasts were among the 10 most accurate on seven of the 10 indicators. ‾‾

They also had the least accurate forecast for nonfarm payrolls.

The runners up in the June contest were Christophe Barraud of Market Securities, Ian Shepherdson of Pantheon Macroeconomics, Joerg Angele of Raiffeisen Bank International, and Ward McCarthy of Jefferies.

The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest. When they differed, the MarketWatch consensus was more accurate than the closely followed Bloomberg consensus 56% of the time in 2018.

The economists in our consensus forecast are: Christophe Barraud of Market Securities, Jim O’Sullivan of High Frequency Economics, Joerg Angele of Raiffeisen Bank International, Ryan Sweet of Moody’s Analytics, Ian Shepherdson of Pantheon Macro, Andrew Hollenhorst at Citigroup, Seth Carpenter’s team at UBS, Richard Moody of Regions Financial, Stephen Gallagher at Societe Generale, Michelle Girard’s team at NatWest Markets, David Kelly at J.P. Morgan Asset Management, Lou Crandall at Wrightson ICAP, Michael Feroli at J.P. Morgan Chase, Peter Morici of the University of Maryland, and Ellen Zentner’s team at Morgan Stanley.

Halfway through the year, Barraud has a slight lead over O’Sullivan in the 2019 Forecaster of the Year contest, which O’Sullivan has won eight years in a row. Sweet and Angele are close behind.

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