Slowdown spurs concern that economy could stall

The U.S. economy’s growth rate is losing speed, prompting questions over how slow it can go and still avoid crashing into a recession.

Whereas expansion below 2% used to almost guarantee the economy would subsequently contract, some economists now reckon the U.S. can wobble around 1% to 1.5% without falling over.

The decline in the economy’s so-called stall speed is a relief after data released Tuesday signaled the weakest manufacturing sector in a decade. It still leaves the Federal Reserve under pressure to cut interest rates and President Donald Trump facing challenges heading into next year’s election.

Whether the longest expansion in history remains intact may ultimately depend on whether consumers are able to maintain spending enough to offset the slump in manufacturing amid the U.S.-China trade war.

“Suddenly the idea of stall speed is much more important today than it has been for most of the expansion,” said Stephen Gallagher, the chief U.S. economist at Societe Generale SA. “The economy is running on one engine, and that’s the consumer.”

At Commerzbank, currency strategist Ulrich Leuchtmann told clients in a report issued Wednesday that “the fact that stall speed is becoming an issue of common interest” may undermine demand for U.S. assets.

Taking a page from aviation, in which the stall speed is the slowest a plane can fly while still maintaining a level flight, the economic equivalent is the point at which growth is no longer self-sustaining.

That happens when consumers and companies pull back in the face of the lackluster economic performance. “When economic actors become sufficiently concerned — whether justified or not — a mild slowdown can easily become worse,” Eric Lascelles, the chief economist at RBC Global Asset Management, wrote in a report last month.

The outlook for growth has indeed softened, with the manufacturing sector already slipping into a recession during the first half of the year, capital investment weakening and job gains moderating. Analysts expect growth in gross domestic products (GDP) to slow to 1.7% next year.

In expansions dating back to the 1940s, real GDP growth below 2% was almost always followed by a recession, according to Lascelles. Now, he and other economists expect the economy can avoid buckling at that pace. A reduced stall speed means growth can be slower and monthly payroll gains can be softer and still sustain the expansion.

The stall speed has largely declined because the potential growth rate of the economy has slowed.

The two concepts are closely tied. Potential growth is the pace at which the economy can expand without inflation heating up. Right now, the Fed sees potential growth at 1.9%.