Doug Duncan: Even US Government Economists Predict Trouble Ahead

Doug Duncan is not your average beltway economist.

The chief economist for Fannie Mae is surprisingly outspoken about the troublesome outlook for the US economy. He's worried about the rising cost of debt service as outstanding credit continues to mount at the same time interest rates are starting to ratchet higher, too.

He predicts the US will enter recession within a year, concurrent with a topping out of America's real estate market. It wouldn't surprise him to see the stock market falter, too, as central banks around the world begin a coordinated tightening of monetary policy and -- similar to the thoughts recently expressed within our podcast with Axel Merk -- Doug expects Jerome Powell to be much more reluctant to intervene in attempt to support asset prices. Having met personally with Powell, Doug thinks the Fed is now happy to see some of the air come out of the Everything Bubble (just not too much and not too fast) -- a market change from past Fed administrations:

Our forecast definitely sees slowing economic activity, particularly in the second half of '19. Part of it has to do with the length of the expansion. Just because an expansion is long doesn't mean it's going to end; but they all have eventually ended, and this one is getting pretty old. I think if it's not the second longest, it's getting to be the second longest that we've ever had shortly.

The tax bill was viewed differently by different parties, but the capital markets initially took that -- plus the $300 billion agreement to get past the expiration of government funding plus the budget agreement -- they took all those things as inflationary. The tax bill itself has a lot of temporary provisions – some of them don’t expire for up to seven years – but some start expiring as soon as three years out. Like, on occasions, take actions today which they see having benefits up until that time of the expiration of those terms, plus the spending component – the $300 billion – also will likely take place in the next four quarters. That suggests that the second half of '19 we may well see the impulse from those things starting to fade. And that will be happening at the same time as the Fed, if it does what it says its going to do, will be continuing its tightening(...)

So,what keeps me up at night? Well, I don’t like the idea that we have a debt to GDP ratio of 100 percent. I don't think we're Japan because we have a more entrepreneurial economy, not a mercantilist economy, but that doesn't mean that debt doesn’t reduce your flexibility. It definitely reduces your flexibility, so it raises risks from that perspective.

The trade negotiations, obviously, are of a concern. Milton Freeman said a good free trade agreement can be written on one page. NAFTA was two thousand pages. It would be silly to suggest Trump doesn't have a point that there's not something in that two thousand pages that didn't work against American interests. On the other hand, if you're going to throw $150 billion of tariffs at the second largest economy in the world, you should expect a reaction. Those who read the history books and the Smoot Hawley tariffs and the Depression and have some understanding of the relationship between the two of those have to be a bit nervous. The Fed, I'm sure, is looking at that.

And the domestic economy, the thing that probably troubles me more than anything else is the decline in new business formation. It's been underway for thirty years. I've got staff that are working just trying to understand that. There's a couple reasons why I worry about that. I just make a comment about ours being an entrepreneurial economy which means it is 'dynamic' – people don’t care if the average income is higher than theirs if theirs is the median. If they expect that there's an opportunity for them to grow and gain one of those high incomes, then they're OK. But if they lose that hope, that leads us to some different possible political economy outcomes which I don’t view as particularly optimal.

But from a self-interested perspective -- remember that we're in the housing and new business formation space – it used to be the case that a when small business would start, it couldn't afford to pay the same wage rate as a large business did because it didn't have the scale or the output or that kind of thing. But what the worker who got the lower wage job also got was training on how to get to work on time, how to work a full day. They would pick up some skills and some behaviors that worked broadly in the employment market. Over time they would move up, and most of them would eventually get to the middle class and buy a house. That's breaking down.

If that engine of growth for people has been cut off, then we could be facing a permanent underclass which carries a whole different set of connotations for a society which, to me, is pretty troubling.

Click the play button below to listen to Chris' interview with Doug Duncan (45m:19s).

This is a companion discussion topic for the original entry at

Doug said “Up until the election, the majority of people believed the economy was heading on the wrong direction even though it was a recovery.” That’s because it was, and is, heading in the wrong direction. Though the government jobs numbers might be improving, people who work for a living know that things have gotten steadily worse through most of the time since 2008. The numbers improved because people were working multiple part time jobs just to get by. All those jobs were counted as gains by the government, not the real quality of life decrease that they represent. It’s only recently that employment has tightened up enough that salaries show any hint of increasing. Health care costs were and are exploding. Returns on savings are negative in real terms. Why would the average American think things are getting better?

is part of the government?!

richcabot wrote:
It's only recently that employment has tightened up enough that salaries show any hint of increasing. Health care costs were and are exploding. Returns on savings are negative in real terms. Why would the average American think things are getting better?
Agreed, and that’s not counting those who’ve fallen off the unemployment insurance, the underutilized, etc. I’ve still got retail stores and restaurants closing in my solidly middle-class area at an alarming rate. The nearest shopping center now has over half the store fronts shuttered. The pain is worse than the numbers show, which only causes people to lose more faith in the system. When people lose faith in the system, and feel lied to, they change the system.

That is rarely a clean or peaceful process.

My wife manages catering and special events for a local restaurant group. Most of the line employees have second jobs, despite the fact that the restaurant pays significantly above Oregon minimum wage and offers subsidized group health insurance.
Their plight is made worse by the housing bubble dramatically increasing local rents.

The local Bon store will go belly up soon. The government tells things are getting better ,but all I see little sings that things are getting worse. Witch one is wrong I don’t know?

Snydeman wrote:
I’ve still got retail stores and restaurants closing in my solidly middle-class area at an alarming rate. The nearest shopping center now has over half the store fronts shuttered.
Same here. My hometown is losing retail stores, incl big-box types (Barnes & Noble, The Sports Authority, K-Mart) at a steady rate. And yet, new retail space is being built out at a breakneck pace. It's mind-bending. Somewhere, in somebody's spreadsheet, all this activity shows up as a "profit" on which somebody's making a tidy bonus. Or, the universe simply is an absurd place... VIVA -- Sager
“…The ecological analogy is a good one, then: the decisive conjuncture has already passed. We’ve already failed. But I think that it’s only in these conditions that there are real possibilities. The foreclosure of any easy utopian future forces people to act in qualitatively different ways. And it doesn’t make sense to try and predict whether we’ll face the harshest conditions or the best, because it’s still a bit too far off, and all the elements are just too variable. It’s a game of black swans—you can lay bets, but all your models will fail. What I can say is that things generally don’t fall to one side only. The likelihood of “total war against the working class” is probably about as good as “Bernie Sanders leads the peaceful overthrow of the capitalist system,” if only because of power’s own inherent paradox. Beyond this, speculation is probably best left to science fiction—which isn’t to dismiss it, of course. But just remember that even a “Global Syria” would still include a Global Kurdistan, whatever that might mean.”