The following is a summary of our recent interview with Neil Dutta, which can be accessed on our site here or on iTunes here.
The case for bulls is strong, noted Neil Dutta, Head of Economics at Renaissance Macro Research, in his recent interview with FS Insider. Though we have seen some warnings signs with tightening credit conditions and in a growing gap between "hard" versus "soft" data, Dutta does not think this is yet signaling an imminent turn in the world's largest economy.
Credit Data Is Backward Looking
Recent concerns over signs of tightening in credit markets are nothing to be worried about, Dutta stated.
Though it’s true that commercial and industrial loan growth has been weakening over the last three to six months, we need to remember that commercial and industrial loans are idiosyncratic, he added. Usually, C&I lags growth.
“I think the weakness in C&I lending is a function of inventory destocking and drying up of energy … and CAPEX loans from last year,” he said. “It’s telling you more about what has happened as opposed to what will.”
The recent loan officer survey from the Fed is showing tightness for C&I and CRE loans. At the same time, corporate bond spreads have narrowed substantially, which shows fears over default risk are quite low.
“If you look at CCC-less-AAA corporate bond spreads — the market’s willingness to fund the riskiest company versus the safest one — those spreads are narrower today than at the time the Fed first raised rates, back in 2015,” Dutta said. “I’m not particularly concerned about credit conditions. I think financial conditions are generally healthy and facilitating economic growth.”
Auto Issues Not Indicative of Problems
Though Dutta agrees that the subprime auto story is something we should be keeping a close eye on, he doesn’t think it poses a systemic problem for the economy.
“People don’t buy cars speculating on price,” he said. “I don’t think it’s the systemic risk that housing was.”
He sees improvement ahead in auto sales, partially because the housing market is in recovery, and with home purchases come garages, he stated. Rising household formation rates will help drive stronger auto sales.
“This is a theme that is really embedded in the market, this idea that autos have peaked,” he said. “I think it’s wrong, which is why the auto sectors have been doing really well over the last several months.”
Divergence Between Hard and Soft Data?
“I think the hard-versus-soft debate is more of a red herring than anything else,” Dutta said.
Employment growth since the election has been strong, and total hours worked in the U.S. over the last 3 months ending in February are up 3 percent at an annual rate, he noted, which are the strongest readings we’ve seen in over a year.
What’s more, if we look at capital spending, core capital goods orders are up quite a bit over the last several months.
“This is … what economists call core business spending,” Dutta said. “Over the last 6 months, that is up 6.5 percent at an annual rate, which is the best since 2014.”
Similarly, since the election manufacturing production is up about 5 percent, and actual exports are following the ISM data.
“2017 is a year where growth is broadening out from consumers to businesses,” he said. “I don’t see much reason to think otherwise.”
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