Fears that a recession could hit the U.S. next year are growing on Wall Street, creating a potential headache for President TrumpDonald TrumpKinzinger welcomes baby boy Tennessee lawmaker presents self-defense bill in 'honor' of Kyle Rittenhouse Five things to know about the New York AG's pursuit of Trump MORE as he seeks to highlight the economy in his bid for a second term.
Economists at Bank of America, Goldman Sachs and Moody’s Analytics in the past few days all raised concerns that a recession between now and next year’s elections is becoming more likely. And they all pointed the finger of blame at Trump’s trade policy.
“I think recession is increasingly likely,” Mark Zandi, chief economist at Moody’s Analytics, said on Monday. “I’d put the odds at just over even for a recession between now and the end of 2020, assuming the president follows through on his tariff threats.”
His remarks came a day after Jan Hatzius, chief economist at Goldman Sachs, said the trade war with China is likely to hurt U.S. growth more than previously forecast.
“Fears that the trade war will trigger a recession are growing,” he said in a research note.
Two days earlier, Bank of America economists said the chances of a recession had risen from 20 percent to about 33 percent, adding that "our model likely does not fully capture the threat of US-China trade tensions spiraling into a more severe trade war, which we view as the biggest downside risk for the US economy.”
“We are worried,” they wrote in their analysis.
By many measures the Trump economy is booming. Unemployment is at historically low levels, inflation is mild and the economy has set a record for an unprecedented 10 years of uninterrupted growth, dating back to 2009.
But one indicator in particular — the yield curve — has economists worried.
The curve usually slopes upward, indicating investors expect a higher yield for long-term bonds than short-term ones. That means they see a strong economy on the horizon.
But when investors see gloomy economic signs, there is often more risk in holding longer-term bonds. When those yields drop, the curve inverts.
An inverted yield curve has been among the best predictors of a recession, and last week it inverted to an extent not seen since just before the Great Recession began in late 2007.
That market indicator, driven in part by the recent blowup with China over trade, has increased the odds the economy may dip into recession between now and Election Day.
But not all Wall Street economists are pessimistic.
Axel Merk, chief investment officer of Merk Investments, said “this time is different” with the yield curve.
He argued that more active management by the Federal Reserve, including the first rate cut since the Great Recession, is one of the factors affecting the yield curve.
Credit markets are still healthy, consumer confidence looks good and the unemployment rate has not climbed back into the danger zone.
“People should only start worrying when more of these indicators are turning,” he argued.
But one thing economists are in agreement about is the damage being done by the trade war with China that began in July 2018.
That yearlong dispute recently entered a new phase, with Trump announcing he would impose 10 percent tariffs on $300 billion of Chinese imports starting Sept. 1, adding to the 25 percent tariffs he previously imposed on $250 billion of Chinese goods.
Beijing was swift to retaliate, weakening its currency to make exports cheaper while moving to block more agricultural purchases from the U.S., hitting one of Trump’s core constituencies.
Though the tariffs might eat as much as half a percentage point from economic growth, which clocked in at less than 3 percent last year, forecasters are even more pessimistic because there are little to no signs that the U.S. and China will strike a trade deal in the near future.
“In March or April, there was an expectation that they would reach a deal and wind down the trade war, but those have been shot down,” said Zandi. “It’s unlikely the president is going to resolve the trade war sufficiently before the election.”
In the meantime, things may get worse on the trade front.
“China can counter by significantly stopping the purchase of goods in the U.S., further destabilize other forces, pull out investments. They haven’t fired all their weapons,” said Eric Schiffer, CEO of the Patriarch Organization, a Los Angeles-based private-equity firm.
The trade war isn’t the only warning sign for growth.
“You’ve got global weakness going on. You’ve got a slowdown in Europe, concerns over Brexit in the UK, and China has dramatically slowed down its growth,” Schiffer said.
Other elements in the U.S. economy are also pulling back, which could spell trouble for Trump.
Gross domestic product is projected to slow to a meager 1.8 percent pace in the fourth quarter. Despite Trump’s campaign promises, the economy has not expanded at 3 percent a year.
Similarly, average job growth has fallen from a brisk 220,000 a month last year to 140,000 in recent months. If it falls below 100,000, the level of job creation won’t be enough to supply the growing labor market and the unemployment rate will start to tick up, Zandi said.
While a recent deal in Congress to increase spending is poised to give the economy a bump, the stimulus from Trump’s signature legislative achievement, the 2017 tax reform, has already petered out and may in fact be a slight drag on growth next year.
But a quick turnaround could be had with a trade agreement between the world’s two largest economies, even if Trump doesn’t get everything he wants.
The president, Merk said, could cut his losses on China to help secure his reelection
On that point, Zandi agrees.
“Trump could end this pretty quickly with a tweet,” he said.