Originally Posted: June 9, 2019
Ravi Batra, SMU professor of international economics was interviewed for this article.
The U.S. economic expansion marks its 10th year this month, matching the 1990s recovery for longevity. But rising tensions caused by trade disputes are raising worries that the expansion could tumble to the ground, taking the decade’s economic gains with it.
“If we can’t stabilize trade relations soon, that’s the biggest risk for a recession,” Carl Tannenbaum, chief economist with The Northern Trust Co., said on a recent visit to Denver.
Tannenbaum said any weakening of the economy will be much milder than the last time. But a trade-induced slowdown would hit businesses and industries that rely on the global supply chain, including Colorado’s farmers and ranchers. Consumers also could find themselves stretched as a host of goods become more expensive or unavailable.
“Potential causes of the next recession in the advanced economies include an escalating trade war, a geopolitical shock, a significant increase in policy and political uncertainty, a spontaneous sharp correction in asset prices, or a sudden downturn in China,” the investment firm Pimco recently told its investors.
Recessions typically result when the Federal Reserve tightens monetary policy to cool an overheating economy. The Fed had been lifting interest rates, but did a sharp pivot in January, largely easing those concerns.
The past two recessions came on the heels of financial excesses, a massive stock market bubble in the early 2000s and an unprecedented housing bubble that triggered a financial crisis in 2008.
Lenders are dealing with poor quality auto loans, student borrowing has skyrocketed, and some corporations have piled on debt and not spent the money wisely. But the excesses, at least the ones that can be seen, aren’t on the same level as those of the past two recessions.
Economists are quick to point out that recoveries don’t die of old age, and there are also a lot of things still right with the economy.
“The length of recovery is not a catalyst for a recession. Imbalances are the catalyst,” said Anthony Chan, chief economist with JPMorgan Chase.
U.S. GDP rose a robust 3.1 percent in the first quarter, and Colorado’s economy advanced 3.5 percent last year, its best showing since 2015. Unemployment remains at 50-year lows nationally and that is pushing wages higher and lifting consumer confidence. Until recently, stock market indices were up sharply. Those all argue against a downturn.
And yet, some indicators are pointing to a slowdown. Auto sales are down from last year, including in Colorado, where they are off 3.2 percent this year. The housing market is cooling, industrial production is slowing and corporate earnings are stalling after years of robust gains. And while overall unemployment remains at a historic low, about 30,000 more people were looking for work in Colorado than in 2017.
Bond markets are offering a lower rate on 10-year Treasury notes than on three-month Treasury bills, an upending of the usual order. The gap or inversion is the largest since 2007, and an inversion has preceded every recession since the end of World War II.
“Stock investors have, until recently, ignored the dark clouds on the horizon, believing that a resolution to the trade conflict with China was just around the corner. But reality has started to sink in, and investor optimism has started to sink as well,” said Andy Ratkai, president of Praxis Advisory Group in Greenwood Village.
Some observers argue that the U.S. and China will sit down later this summer at the G20 Summit and things will get back on track. But Ratkai sees a bigger cultural battle at play, one pitting two very different economic models that won’t be easily resolved as China grows in power.
“Clearly, a recession will occur if the nascent slowdown in business activity spreads to more sectors both here and abroad,” he predicts. “Confidence is a very fragile thing and can turn on a dime.” READ MORE