I recently listened to an excellent podcast on Bloomberg’s ‘Masters in Business’ series with economist Ed Hyman  (podcast).  Ed Hyman is chairman of ISI Evercore and has been voted Wall Street’s top economist by Institutional Investor for 35 consecutive years.

Ed was discussing the prospects for the economy.  Historically, we have seen economic business cycles typically in the 4-5 year range.  Given the last downturn in 2007-2008 the question is: “are we anywhere close to the economy going into recession?” Ed’s take was that there is a ‘very very low’ chance of this, given the data he is seeing.  How can this be?  We know that jobs growth, GDP growth and wage inflation have all been quite low.   Ed’s analogy is that of ‘speed’ vs. ‘torque’.  He sees the US economy as moving slowly but with a strong, consistent force.

What data is Ed looking at?  Ed feels that we are still in the early stage of economic expansion.  The Fed has yet to start raising rates (historically, most recessions have started with an inverted yield curve).  He notes that hourly wage rates are starting to tick up.  Historically, when the unemployment rate falls below 5.5%, he argues this is the point where wage inflation may kick in.  With the latest jobs data release today, the June unemployment rate has fallen to 5.3%.  Traveling around the country, he feels he gets a direct sense of the economic momentum.  City after city he visits seems to be building steam – New York, Miami, Seattle, San Franciso.  Consumer Sentiment now stands at 96.1.  Ed argues that with small raises, people don’t feel particularly good about the economy but, as wage increases kick in confidence grows and consumers spend more.

Mr. Hyman wasn’t ready to forecast when the next downturn would happen.  He said ‘we will have to watch and see what happens’.  As far as the stock market goes, there are concerns regarding earnings growth, how the market will react to the Fed rate hike and volatility due to the European situation, but if we buy into Hyman’s view of the economy, equity markets should have a strong tail wind from the economy.