Global warnings of a recovery running down
Confronted with disappointing data from around the world, economists are whispering a word that hasn’t seemed like a real possibility in years: recession.
It starts with the slowdown in China, which is already straining the global recovery. The world’s second-largest economy has lost its appetite for the raw materials that fueled its industrial boom, leaving high and dry the smaller countries that supplied it with resources. Slower growth abroad translates into weaker foreign currencies and a stronger U.S. dollar, which makes American goods harder to sell in the global marketplace.
A growing chorus of prominent economists and analysts are warning that those dynamics could tip the world — and the United States along with it — into recession within the next two years. The fear is showing up in recent wild swings in the financial markets, generally rare outside broader economic downturns. The pace of U.S. job growth has slowed substantially compared with last year. And although the economic expansion has yet to reach many workers, it has actually lasted longer than the postwar average and may be showing signs of fatigue.
“The global economy is uncomfortably close to the edge,” said David Stockton, senior fellow at the Peterson Institute for International Economics.
In addition, the final months of the year are a potential minefield for the U.S. recovery: Congress has to raise the nation’s borrowing
limit before Nov. 3 to avert a catastrophic default. Lawmakers also need to approve a budget for the federal government or face a confidence-sapping shutdown. A wrong move by the Fed as it weighs whether to raise interest rates this year could stymie the economy’s momentum.
Most analysts still believe that the most likely scenario has the country continuing to chug along: Congress reaches an eleventh-hour compromise. The nation’s central bank maintains its balancing act. And the U.S. recovery is rattled but not derailed by international turmoil. Current estimates of economic growth hover around a sluggish 1 percent annual rate, and though expectations for next year have been lowered repeatedly, they remain positive.
But economists say those forecasts, which are by nature uncertain, are particularly murky now. This week, China reported that its economy grew at a 6.9 percent annual rate over the past three months. That’s far faster than U.S. growth but still the slowest pace since 2009 and shy of the government’s target of 7 percent.
Many analysts say the official Chinese numbers are too rosy. In that country’s crowded cities, high-rise apartment buildings sit vacant, and factories stand idle after saturating the global marketplace with cheap goods. Outside economists believe that the country’s growth rate may be as low as 3 percent, and the uncertainty makes forecasting the rip- ple effects even more precarious.
China accounts for only a tiny sliver of U.S. exports, but its influence is far wider. The slowdown in China has been pushing down oil prices just as America’s production was peaking.
Meanwhile, countries such as Brazil and Australia that once boomed by exporting raw materials to China are suffering a reversal of fortune as commodity prices plunge. As growth slows, their currencies are weakening against the dollar, which, in turn, makes U.S. exports more expensive and drags down the recovery here.
That complicated economic web has plenty of room for a surprise — a bigger contraction in China, a sharper rise in the dollar, a more dramatic slowdown in hiring at home — that could reverse the progress the U.S. recovery has made.
“Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air,” wrote Willem Buiter, chief global economist at Citigroup, who assigned a 55 percent chance to the prospect of a moderate to severe global contraction next year.
Since World War II, recessions, on average, have been spaced about five years apart. The current expansion is more than six years old, having begun in July 2009. A recession is generally defined as two consecutive quarters of contraction, but an official designation is often not made until long after the decline has begun.
The Great Recession started in December 2007 but was not officially diagnosed until a year later — after the Dow Jones industrial average had fallen about 40 percent and more than 3.5 million workers had lost their jobs.
A common refrain in economics is that expansions do not die of old age. Rather, they are victims of policy decisions, such as the Fed interest rate hikes in the early 1980s to tame doubledigit inflation, or of unexpected shocks, such as the implosion of the subprime mortgage industry.
But the spring of 2001 may offer a more useful comparison to the current situation. The country faced weak growth abroad and the fallout of the dot-com bubble, but only 15 percent of economists surveyed that summer believed a downturn had begun, according to Blue Chip forecasts.
Yet the nation was in the midst of a recession that lasted nine months. The downturn was relatively shallow, and in the aftermath of the Sept. 11 terrorist attacks, then-President George W. Bush quickly proposed a stimulus package that delivered tax rebates to every household.
“A recession is inevitable in the fullness of time. The question is when is one likely to occur?” said Jason Thomas, director of research at the Carlyle Group, a financial services and private equity firm.
Thomas said he doesn’t believe that one is imminent. But the more important question, he said, is how damaging one would be if it did occur. Most economists, including Thomas, believe that the next recession is likely to be mild. The problem is that the nation’s top policymakers may have less power to combat it.
If anything, analysts worry that officials in Washington will be the ones who send the economy over the edge. Bitterly divided lawmakers have no clear plan for averting a catastrophic default on the nation’s debt obligations next month or a shutdown of the federal government in December. The hurdle for any stimulus package may be insurmountable.
Another backstop during the most recent financial crisis was the Fed. The nation’s central bank slashed its key interest rate to zero in December 2008 and has since pumped trillions of dollars into the economy. Seven years later, rates are still at zero, and the Fed has maintained a $4.5 trillion balance sheet. In other words, most of the central bank’s arsenal is already deployed.
In an interview, former Fed chairman Ben S. Bernanke said that if a recession was to strike, the central bank could resume pumping money into the economy, promise to keep interest rates at zero even longer or even turn them negative — essentially doubling down on the experimental policies from which officials have been trying to extricate the economy.
“They’re not, on the whole, a super-attractive set of options,” Bernanke said. “So you would hope first that you avoid that situation.”
But for many Americans, the difference between recovery and recession is blurry at best. The nation’s labor force has shrunk to the lowest level since the 1970s, partly because many people have given up looking for work. The number of people working part time even though they would prefer full-time jobs remains well above the pre-recession level.
Perhaps most important, wage growth has remained stuck at about 2 percent, despite a drop in the unemployment rate and a pickup in hiring.
Georgia resident Dawn O’Neal said she is making less now than she did 15 years ago when she started her career in early childhood education. At 48, she is paid $8.50 an hour and believes that the minimum wage should be raised to $15. At the very least, she said, she shouldn’t be moving backward.
“People who work every day, people who work 40 hours a week need to get paid what they deserve,” O’Neal said. “They shouldn’t have to worry about struggling or surviving.”
An oil drill in Oklahoma, a significant producer of oil and gas. The slowdown in China has pushed down oil prices just as American production was peaking, forcing the industry to shed jobs — another example of China’s broad influence on the world economy.