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theconversation.com

Could a recession be just around the

corner?
Amitrajeet A. Batabyal
5-7 minutes

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 about 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.

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Concerns have grown that the recent truce between China and the U.S. won’t last.
AP Photo/Pablo Martinez Monsivais

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.

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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.

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Fed Chair Jerome Powell may slow the pace of interest rate hikes. AP Photo/Cliff
Owen, File

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
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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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