U.S. still expanding but perils increase

Dropping stocks, White House chaos pose a threat

Now in its 10th year, America’s economic expansion still looks sturdy. Yet the partial shutdown of the government that began Saturday has added another threat to a growing list of risks.

The stock market’s persistent fall, growing chaos in the Trump administration, higher interest rates, a U.s.-china trade war and a global slowdown have combined to elevate the perils for the economy.

How markets and government officials respond to risks could determine whether the secondlongest U.S. expansion on record remains on course or succumbs to a recession. A closer look at the risks:

■ Administration chaos: It has been a tumultuous few days even for a White House that has been defined by the president’s daily dramas. The shutdown is unlikely to hurt economic growth much, even if it lasts a while, because 75 percent of the government is still being funded. The problem is that the Trump administration appears disinclined to cooperate with the incoming House Democratic majority. So the federal support through deficit spending that boosted the economy this year will likely wane, Lewis Alexander, U.S. chief economist at Nomura, said.

■ Tumbling stocks: The Dow Jones Industrial Average plunge followed a propulsive winning streak for the stock market that began in 2009. But investors are internalizing all the latest risks, including Trump’s trade war with China and higher borrowing rates, and how much they might depress corporate profits and the economy. Jim O’sullivan, chief U.S. economist at High Frequency Economics, said markets can often fall persistently without sending the economy into a tailspin. But he warned of a possible feedback loop in which tumbling stock prices would erode consumer and business confidence, which, in turn, could send stocks sinking further. At that point, the economy would likely worsen, the job market would weaken and households would suffer.

■ Trade war: For economists, this may pose the gravest threat to the economy. Trump has imposed tariffs against a huge swath of goods from China, which has retaliated with its own tariffs on U.S. products. “The trade war with China is now the biggest impediment to U.S. economic growth,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in his forecast for 2019.

■ Fed rate hikes: The Federal Reserve has raised a key short-term rate four times this year and envisions two more increases in 2019. If the central bank were to miscalculate and raise rates too high or too fast, it could trigger the very downturn that Fed officials have been trying to avoid. This has become a nagging fear for investors.