Are we headed for re­ces­sion?

The Morning Journal (Lorain, OH) - - OPINION - Ami­tra­jeet A. Batabyal Rochester In­sti­tute of Tech­nol­ogy The Con­ver­sa­tion is an in­de­pen­dent and non­profit source of news, anal­y­sis and com­men­tary from aca­demic ex­perts.

The U.S. econ­omy is grow­ing at the fastest pace in five years, Amer­i­can com­pa­nies are earn­ing record prof­its and un­em­ploy­ment is at the low­est level in al­most half a cen­tury.

So why are Wall Street and some econ­o­mists sud­denly wor­ried about a re­ces­sion?

Fi­nan­cial mar­kets in par­tic­u­lar have been sig­nal­ing that trou­ble is brew­ing.

The Stan­dard & Poor’s 500, which tracks the big­gest U.S. com­pa­nies, has plunged as much as 6 per­cent since Dec. 4 be­cause of wor­ries about trade and slow­ing global growth.

And a key bond met­ric that has pre­saged ev­ery re­ces­sion since 1960 is warn­ing an­other may be on the way.

As an econ­o­mist who teaches and con­ducts re­search in in­ter­na­tional trade and fi­nance, I see three cred­i­ble con­cerns driv­ing the wor­ries.

Trou­ble in trade land

One ma­jor is­sue is the on­go­ing trade war be­tween the U.S. and China.

The U.S. has im­posed tar­iffs on about US$250 bil­lion of Chi­nese im­ports – al­most half of all trade with the coun­try — in what I con­sider a mis­guided ef­fort to get Bei­jing to buy more Amer­i­can goods and grant greater mar­ket ac­cess to U.S. com­pa­nies.

U.S. Pres­i­dent Don­ald Trump has threat­ened to ap­ply du­ties to all im­ports if his de­mands aren’t met.

In turn, China has put tar­iffs on $60 bil­lion of Amer­i­can goods.

This is bad for the U.S. econ­omy be­cause tar­iffs tend to re­duce trade, slow­ing growth and mak­ing goods more ex­pen­sive for con­sumers.

A just-re­leased study from the right-lean­ing Tax Foun­da­tion, for ex­am­ple, found that Trump’s tar­iffs have so far low­ered in­comes by an av­er­age of $146 a year for tax­pay­ers who earn $27,740 to $43,800 and have re­duced U.S. hir­ing by the equiv­a­lent of 94,300 full-time jobs.

On Dec. 1, mar­kets ini­tially breathed a sigh of re­lief af­ter Trump and Chi­nese Pres­i­dent Xi Jin­ping reached a 90-day truce in the war, giv­ing the two coun­tries time to try to work through their dif­fer­ences.

The op­ti­mism faded quickly, how­ever, af­ter con­flict­ing re­ports emerged about what the two lead­ers ac­tu­ally agreed to and Trump called him­self a “tar­iff man” in a threat­en­ing tweet.

The ar­rest of a Huawei of­fi­cial in Canada on a U.S. re­quest fur­ther risked dis­rupt­ing the ten­ta­tive cease­fire, show­ing how frag­ile the Trump-Xi deal is and how eas­ily the sit­u­a­tion could re­turn to a war foot­ing.

Global head­winds

A se­cond worry is slow­ing global growth.

In Europe, the com­bined economies of the 19 coun­tries that use the euro barely grew in the most re­cent quar­ter – the low­est in four years – and econ­o­mists are warn­ing re­ces­sion may be com­ing to the con­ti­nent.

At the same time, Bri­tain’s im­pend­ing and po­ten­tially chaotic exit from the Euro­pean Union is ex­pected to ham­mer its econ­omy.

And Trump’s trade war and tar­iffs – which are not only squeez­ing the Chi­nese econ­omy but many other coun­tries such as Canada, Mex­ico and mem­bers of the EU – are mak­ing mat­ters worse.

All these chal­lenges con­vinced the In­ter­na­tional Mon­e­tary Fund to lower its global growth fore­cast for 2019 from 3.7 per­cent to 3.5 per­cent and warn of in­creas­ing “down­side risks” as a re­sult of the tar­iffs and other prob­lems.

A global growth slow­down means for­eign­ers will buy less Amer­i­can-made stuff, which ul­ti­mately hurts the U.S. econ­omy.

The Fed’s fears

These prob­lems are se­ri­ous enough that they’re even rat­tling the Fed­eral Re­serve.

Un­til now, the U.S. cen­tral bank has been on a de­lib­er­ate path of grad­u­ally rais­ing in­ter­est rates on the premise that the Amer­i­can econ­omy was fun­da­men­tally strong and would con­tinue to grow.

As re­cently as Oc­to­ber, Fed Chair Jerome Pow­ell de­scribed the econ­omy’s low un­em­ploy­ment and sub­dued in­fla­tion as sus­tain­able and “not too good to be true.”

That may no longer be the case. Wall Street traders, who pre­vi­ously had some faith that the Fed will fol­low through on its plan to raise rates sev­eral times in both 2019 and 2020, in­creas­ingly don’t ex­pect even a sin­gle rate hike next year. Since the cen­tral bank typ­i­cally raises rates when the econ­omy is strong, that sug­gests they be­lieve it has se­ri­ous con­cerns about its tra­jec­tory.

The re­sult­ing un­pre­dictabil­ity over what the Fed’s go­ing to do next has shaken in­vestors and mar­kets and con­trib­uted to fears about an im­pend­ing re­ces­sion, which is typ­i­cally de­fined as two straight quar­ters of de­clines in over­all eco­nomic ac­tiv­ity.

We may learn more on Dec. 19, when the Fed is ex­pected to raise in­ter­est rates for the ninth time since 2015.

So is a re­ces­sion im­mi­nent? The cur­rent ex­pan­sion has lasted since the of­fi­cial end of the Great Re­ces­sion in June 2009, or al­most nine and a half years. If it lasts seven months more, it’ll be the long­est ex­pan­sion in at least 160 years.

Be­cause of the cycli­cal na­ture of busi­ness ac­tiv­ity, there is no ques­tion that a re­ces­sion will in­evitably oc­cur at some point in the fu­ture.

Whether it’ll hap­pen next year or fur­ther down the road is hard to pre­dict. But you could ar­gue, per­haps we’re due.

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