Director of Real-Time Economics
Ryan Sweet is director of real-time economics at Moody's Analytics. He is also editor-in-chief of Economy.com, to which he regularly contributes, and a member of the US macroeconomics team in West Chester, PA. He is among the most accurate high-frequency forecasters of the US economy, according to MarketWatch. He is also an adjunct professor in the Economics and Finance Department at West Chester University of Pennsylvania. He has a master's degree in economics from the University of Delaware and a bachelor's degree in economics from Washington College.
President Trump has escalated the trade war with China, and nearly everyone has been wrong-footed by the move.
According to the Federal Reserve's “Financial Stability Report” of May 2019, not only has the outstanding debt of nonfinancial businesses outpaced nominal GDP during the past 10 years (or since 2008), but the growth of debt has been skewed toward riskier firms.
During a week of heightened equity market volatility, the corporate credit market was relatively calm. As of May 8's close, the credit market had yet to sense much collateral damage from an intensification of the trade conflict between China and the U.S.
The now positive trend of Baa-industrial credit rating revisions is nearly diametrically opposed to the negative trend of high-yield rating changes.
A high ratio of corporate debt to GDP is tolerable as long as a material contraction of core pretax profits is avoided. History shows that the ratio of corporate debt to core pretax profits performs better at explaining high-yield defaults than does the ratio of corporate debt to GDP.
The U.S. economy has weakened in early 2019, fanning concerns that the expansion is running out of steam. However, a number of factors that are contributing to this apparent downshift are temporary.
The credit ratings distribution of outstanding U.S. high-yield corporate bond debt and the distribution of high-yield credit rating revisions now deliver conflicting messages regarding the high-yield default rate's likely direction.
The faster growth of nonfinancial-corporate debt relative to both nominal GDP and the group's core pretax profits has been offset by the comparatively slow growth of net interest expense.
Recession fears abound yet the prices of earnings-sensitive securities and industrial commodities have held up reasonably well. Indicators of financial distress have yet to warn of sharply lower share prices and a surge in corporate debt defaults. Apparently markets are confident in the remedial powers of lower interest rates.
The Treasury bond market was stunned by the drop in the Federal Open Market Committee's “dot chart” projection for year-end 2019 fed funds' midpoint from the 2.875% of December 2018's projection to 2.375% as of March 2019's projection.