If you take the U.S. stock market as a serious barometer of the American economy, then you’ve got nothing to worry about.
The S&P 500 index sank in the last quarter of 2018, but recovered most of its losses this year and the bulls are in the ascent. And on Wednesday, Wall Street got more good news from the Fed, which promised that interest rates would remain on hold for the rest of the year. Fed Chairman Jerome Powell even said the U.S. economy is in a "good place" and that the outlook is "positive."
Investors are so averse to higher interest rates that they seem they quite willing to avoid asking the obvious question, which is: If everything is going so swimmingly, why is the Fed suddenly becoming so cautious? Is the U.S. going to keep on enjoying an orangey-locks economy, a Trump-era version of a Goldilocks economy of low inflation and high growth?
Worrying data has hit the headlines recently, including declining new home sales and manufacturing output in America. Elsewhere, there’s growing evidence that the Chinese economic growth is wilting and Europe is moving toward a recession.
None of these are so decisive as to worry the stock market, or for that matter the general economic consensus. Even as it warned of risks that “tilt to the downside,” the International Monetary Fund trimmed its forecast for global growth in January to 3.5% from a previous 3.7%. But it left its forecast for the U.S. at 2.5% and only seems some winding down in 2020. Most metrics still look positive.
As the U.S. goes
Yet not everyone is on the same page. Robert Shiller, the Nobel Prize winning economist, estimates that the probability of an American recession in the next 18 months is one-third to one-half chance of a recession. A poll by the National Association for Business Economics sees a 10% chance of recession in the U.S. this year and a 42% chance in 2020. UBS’ model for the American economy showed a massive jump in March in the risk of a contraction to 75%, three times its December level.
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As the U.S. goes, so goes the world. China may get huge amounts of attention for its long growth spurt and role as the world’s factory, but the U.S. economy is bigger and its global links give magnify its raw GDP weighting.
Just ask Iran, which is sinking under sanctions unilaterally imposed by the U.S. alone. When America talks, the world listens, and when America goes into a recession, the world doesn’t have much with which to resist it.
Shiller admits he isn’t very confident about his prediction, and the reason is that human behavior is so unpredictable. He doesn’t mention any humans in particular, but I can think of at least two, whose personalities could lead the world down the recession path.
It’s not that they can do it single-handedly, but given the global slowdown already underway, high levels of debt in sensitive places like China and U.S. corporations, and paucity of tools left for governments to cope with a downturn, the missteps of those two humans could be fatal.
The first is, of course, Donald Trump. The tax cuts he engineered have artificially extended the sell-by date for America’s economic expansion. But their effect is rapidly winding down and isn’t at all clear what could replace it except for the Fed to keep interest rates low -- another strategy that can only delay, not prevent, the pain.
Meantime, Trump’s trade war with China hasn’t proven as easy to win as the president promised. It is taking a toll on the Chinese economy, as expected, but it also hurting the U.S., perhaps even more. With a divided Congress and Trump’s predilection for partisan fighting, a Trump White House would have a hard time rallying Congress to undertake counter-recessionary measures.
The second human is Chinese leader Xi Jinping, who presides over the world’s No. 2 economy. Beijing has engineered the Chinese economy out of slowdowns before, most notably during the 2008 financial crisis, and is taking measures now amid signs that growth is slowing -- and probably slowing by more than the official figures show.
Beijing’s track record and the fact that the Chinese press isn’t allowed to delve into the deliberations of top leaders, their disagreements and mistakes give the impression that Chinese leaders are smarter than they are and that they will succeed again. The stakes are high.
A big downturn would break the rules of the game in China where ordinary citizens are supposed to play the role of consumers looking forward to a pay raise and an even nicer overseas holiday year after year, in exchange for letting the leaders run the country. Xi has increased the stakes even more in the game by amassing so much power and creating a personality cult around himself.
Unlike Trump, Xi wouldn’t be sent back to the penthouse from whence he came in the next election. Xi’s choices are to succeed in keeping the Chinese economy growing or risk social unrest with unpredictable consequences. That means he may well make desperate, dumb decisions – which will lead China into the recession that he desperately wants to avoid.