For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as
defined by local laws and regulations.

Principal Global Investors

Economic Insights: Is recession already baked in?
August 2019
Commentary by Robert F. Baur, Ph.D., executive director, chief global economist

The summer market relapse is well underway. The plunge in bond yields is bringing
increasingly agitated warnings about worsening growth and recession. But thisfrenzied agonizing may simply mean we’re in the worst of the slowdown. In otherwords, it’s always darkest before dawn.
The odds, we think, we hope, favor the latter.

A storm before the calm
Attitudes can change as fast as the weather, can’t they? Major indices on United States stock markets hit all-timehighs in July and 10-year U.S. treasury bond yields stabilized near 2%. All was right with the world.
Then sentiment collapsed with bond yields throughout August as 30-year U.S. treasury yields fell below 2%—a
new record low—and 10-year yields breached 1.5%. Traders said this was the consummate economic harbinger
and the August plunge meant distress at best, recession likely. Trade tensions escalated with mutual retaliations
between the U.S. and China. U.S. stock indices whipsawed as prices moved more than 1% for 10 days in August,the most since gloomy February 2018.
Central banks are in a tizzy, too. More than 30 have sliced interest rates this year, from Botswana to New Zealandto China, with more cuts coming. At Jackson Hole, Federal Reserve (Fed) Chair Jerome Powell ditched language
about a “mid-cycle adjustment” in fed funds, indicating that policy would adapt to incoming data, while notingthat prior weeks had been “eventful.” Under pressure from negative interest rates, bank stock indices in Europe
and Japan are plumbing 20-year lows. A robust U.S. dollar is putting pressure on Argentina and other emerging
markets. Still, an encouraging Presidential tweet or lack of Chinese retaliation can turn a vicious down day intoa surging rally.
But even with the plunge in long-term yields and agonizing about recession,
have the underpinnings of world growth worsened drastically? We don’t think so.
The world slowdown began in China in 2017 when officials put restrictions inplace to ease pollution and slow the rise in debt. The resulting slump gradually
migrated around the world. As growth in China slid, countries that exported toChina saw reduced sales, curbing growth in emerging countries and Europe,
especially Germany. U.S. growth was the last to slow, as the boost from tax cuts
waned and trade uncertainties curtailed capital spending.
World growth has been slowing since mid-2018—slow growth is nothing new.

But even with theplunge in long-termyields and agonizing
about recession, havethe underpinnings
of world growthworsened drastically?
We don’t think so.

Expressions of opinions and predictions are accurate as of the date of this communication and are subject to change without notice.
There is no assurance that such events or prospections will occur and actual condition may be significantly different than that shown here.

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as
defined by local laws and regulations.

Stabilization comes before calm
Last month, we noted signs of progress. A few more are popping up. Yes, the broad Markit News surveys of
U.S. businesses were weak with manufacturing edging below 50 (a small contraction). That’s still well aboverecession levels. Further, the six regional U.S. manufacturing company surveys upgraded in August with fiveshowing expansion versus only two in July. Bank loans are rising. Initial claims for jobless benefits show no
negative trade impact. Layoff announcements are minimal. Wage gains are still accelerating, with the latest
Atlanta Fed Wage Tracker up 3.9%. Second quarter corporate profits jumped 5.1% and are now up 2.2%
over the prior year, no longer a recession indicator. Consumer spending is robust, up 2.7% over last year andappears on track for a strong gain this quarter. Gas prices are falling, helping budgets. The household savingrate is 7.7%; balance sheets are in fine shape.

Even in beleaguered
Europe, where thebusiness confidence
shock was the worst,
data is trending
modestly positive.

Even in beleaguered Europe, where the business confidence
shock was the worst, data is trending modestly positive. The
European Economic Sentiment Indicator rose a few ticks,
contrary to expectations. The composite Eurozone businesssurvey rose in August to a decent 51.8, still above a January
low. The drop in the jobless rate to a decade low 7.5% has beenbroad-based. German manufacturing was badly thumped byfalling exports to China, but the unemployment rate is only 3%,
and companies report labor shortages.

Asian Emerging Markets may also be on the mend with better export and production data, especiallyin Singapore, South Korea, and Taiwan. Mainland China business surveys for August improved for both
services and manufacturing and are trending modestly higher. Industrial profits in China showed recovery
in July. Borrowing rates were lowered for small businesses and more fiscal stimulus is likely coming. Global
companies most exposed to China are outperforming. Local Chinese equity indices had better returns inAugust than major U.S. indices.
In Japan, the economy has been struggling ahead of the scheduled October rise in the Value-Added-Tax.
The U.S. and Japan will formally sign a trade agreement at the end of September, which should be positive
for both signatories.

Looking ahead
The escalation of trade conflicts and tariffs in August did worsen sentiment and likely
delayed further recovery. With uncertainty high, it’s natural for business leaders to
shelve long-term capital spending decisions until the trade dustup clears. Investment
has shrunk around the world, but uncertainty has so far not shriveled hiring plans.
Could we talk ourselves into a recession? Sure. A further downward spiral insentiment would be trouble. It could start a self-fulfilling cycle of layoffs, puny wage
growth, anemic consumer spending, and lousy profits. Has that ever happened?
It’s not evident. Past U.S. recessions have mostly begun after a shock or imbalance,
which then impacts sentiment. Few imbalances are apparent.

We think it’s too
early to plan forrecession within
the next year ...
The record-long
U.S. expansion
still has legs.

We think it’s too early to plan for recession within the next year. That’s more likely a2021 story. The record-long U.S. expansion still has legs (see: a healthy labor market
and vigorous wage gains supporting consumers). A slump remains at bay. The plunge
in U.S. treasury bond yields likely has more to do with expected central bank easing
and yield-seeking inflows from Europe and Japan than actual recession fears. China isadding to its fiscal and monetary stimulus. Central banks stay very accommodating.
Financial conditions have eased. There is little stress in credit markets.
We expect a mild pickup in world growth in the fourth quarter.

Expressions of opinions and predictions are accurate as of the date of this communication and are subject to change without notice.
There is no assurance that such events or prospections will occur and actual condition may be significantly different than that shown here.

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as
defined by local laws and regulations.

The market message
The most disturbing feature of the year to date has been
the relentless nose-dive in long-term safe-haven bondyields. From a peak of 2.8% last January, yields on 10-year
U.S. treasury bonds ended August at 1.5%. Similar maturity
German bund yields plummeted from 0.3% to 0.7%. How
can yields be negative? Central bank action. And a negative
yield means a sure loss for bond buyers. Why would anyone
do that? Expected profits from even lower rates; fear ofworse losses elsewhere; regulations for financial institutions;no safe alternatives.
But it’s still surreal.
The fear generated by the plunge won’t vanish easily. Central
banks will lower rates further. The Fed will cut the funds rateby at least 0.25% in September, with some odds of a 0.5%
drop. If markets stay roiled, there may be further cuts. The
European Central Bank will drop its official rate more deeply
into negative territory and probably restart bond purchases
in September. Even if inflation does inch higher, which
we expect as the slowdown fades, central banks will stayaccommodative for a long time. We doubt the Fed will raise
rates again until after the next recession.
Long-bond yields are too low even for the current
environment, but they will likely not advance without clear
evidence of a pickup in growth. August was an ugly monthfor investors who were not overweight defensive stocks or
mostly in bonds. With any trade resolution unlikely soon,
the erratic markets of August may persist into October, an
historically tough month for investors. If that’s the case, U.S.
treasury yields could retest the lows of 2012 and 2016.
Beyond that, government bond yields are surely tracingout a trough that will hold into 2021. This would be a greattime to secure a fixed-rate loan or mortgage for a coupleof years. Inflation is at a low ebb now, but upward pressure
is likely coming. That’s because inflation has been weak
this year as world growth slowed the last 18 months. Any
recovery would push inflation higher. Inflation has also been
ultra-low since the financial crisis as slack exploded in labormarkets and production facilities. The decades-low joblessrates in developed countries and rising capacity utilizationsuggest that slack is fading. Low inflation that came with it
will reverse. The down pressure on inflation from 25 years ofoutsourcing should diminish, too. Wage costs in China have
surged and supply chains are shifting due to political forces.

Regarding equities, most world stock indices are ahead forthe year, thanks to the turnaround in central bank intentions
and the collapse in interest rates. The rest of the year may
not be so pleasant. The volatility of May and August will likely
continue until a definite recovery of world growth becomes
evident sometime in the fourth quarter. That pickup in
growth should spark a modest equity rally into 2020, backto recent highs or beyond. It might start from a lower level,
however.
The wonderfully profitable investment cycle from March2009 through last year is likely over. Valuations peaked in
January 2018 and are lower today. The long leadership oftechnology companies appears to have peaked in June oflast year. Investors are searching a new, long-enduring themeor trend, but they’re not finding who or where it might comefrom. As trade tension and growth worries have intensified,investors rotated into defensive sectors taking them tovaluation extremes relative to the rest of the market. That
explains the strong recent outperformance of real estate
investment trusts, utilities, and consumer staples sectors.
That’s also typical equity market performance late in abusiness cycle.
We’ve advised caution for many months and still believe it’s
the right touch. Without a recession, it’s hard to imagine U.S.
treasury yields going much lower from here. We’d prefer highquality investment grade or high-yield corporate bonds over
governments as they offer higher yields. Their yield spreads
to U.S. treasuries could even narrow, raising returns if growth
improves and fear recedes.
For investors with cash to put to work, short-term U.S.
treasury bonds offer some yield, tax advantages, and safety.
While the end of the business cycle is somewhere in the
future, we don’t think it’s imminent, so cashing out of
equities is likely too drastic a step just yet.
We think there’s still a little upside in large-cap U.S.
stocks, balanced between sectors. Beyond a further major
escalation in trade conflicts, the biggest risk is a rise inlong-term government bond yields. That’s likely coming, but
certainly not in the immediate future.

Expressions of opinions and predictions are accurate as of the date of this communication and are subject to change without notice.
There is no assurance that such events or prospections will occur and actual condition may be significantly different than that shown here.

Disclosures
Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of April 2017.
Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do
not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of
future performance and should not be relied upon to make an investment decision.
The information in this document contains general information only on investment matters. It does not take account of any
investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice,an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events
regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are
subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation tobuy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a
specific security for any client account.
Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied
warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document orin the information or data provided in this document.
Any representations, example, or data not specifically attributed to a third party herein, has been calculated by, and can be
attributed to Principal Global Investors. Principal Global Investors disclaims any and all express or implied warranties of reliabilityor accuracy arising out of any for error or omission attributable to any third party representation, example, or data provided
herein.
All figures shown in this document are in U.S. dollars unless otherwise noted.
This document is issued in:Japan by Principal Global Investors (Japan) Ltd. (Kanto Local Finance Bureau (Kinsho) No. 462,
Japan Investment Advisers Association,
The Investment Trusts Association, Japan
This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such
distribution or use would be contrary to local law or regulation.
©2017 Principal Financial Services, Inc. Principal, Principal and the symbol design and Principal Financial Group are trademarks
and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group. Principal Global Investors is theasset management arm of the Principal Financial GroupDisclosures
本書は情報の提供のみを目的として作成されたものです。本書中の情報は、弊社及びプリンシパル・
ファイナンシャル・グループの関連会社において信頼できると考える情報源に基づいて作成していますが、適用法令にて規定されるものを除き、本書中の情報・意見等の公正性、正確性、妥当性、完全性等を保証するものではありません。本書中の分析、意見等はその前提が変更された場合には、変更が必要となる性質を含んでいます。本書中の情報は、弊社の文書による事前の同意が無い限り、その全部又は一部をコピーすることや配布することは出来ません。
また、本書中の情報はあくまでも投資に関する一般的なものであり、投資に関する完全な情報が記載されているものとして依拠されるべきではありません。 本書中の情報は貴社の投資目的、特定な
ニーズ、または財政状況を考慮したものではありません。投資判断をする前には、その投資がお客様の投資目的、特定なニーズ、および財政状態にとって適切であるかをご検討ください。
MSCI指数は、MSCIが開発した指数です。当指数に関する著作権、およびその他知的財産権はMSCIに帰属しており、書面による許諾なしにデータを複製・頒布・使用等することは禁じられております。MSCIおよびその関係会社は、データの独創性、正確性、完全性、商品性、使用目的への適合性について保証するものではなく、当指数の使用に伴ういかなる責任を負いません。
記載の内容は過去の実績値であり、将来を約束するものではありません。

プリンシパル・グローバル・インベスターズ株式会社
住所：〒100­0011 東京都千代田区内幸町1­1­1 帝国ホテルタワー１1階
電話：03­3519­7880（代表） ファックス：03­3519­6410
代表者：代表取締役社長 板垣 均
ホームページ：http://www.principalglobal.jp
金融商品取引業者登録番号：関東財務局長（金商）第462号
加入協会：一般社団法人 日本投資顧問業協会
一般社団法人 投資信託協会

マーケットレポート：
957370