US Recession: Calculated Approximation Or Mere Overestimation?
Posted on January 22, 2019

For quite a while now, there has been ongoing debate whether the world’s largest economy will plunge towards recession in coming years. Various economists have predicted US economy to suffer in 2019 with real possibility of recession in 2020 or later. On contrary, some experts don’t believe that a recession is an immediate threat to the US economy. But amid the rumors, the question is, will recession strike US economy anytime sooner? 

White House’s 1.5 trillion tax cuts and stimulus boosted US economy’s growth that peaked up at 4.2 percent in second quarter of 2018. Even though the economy slowed a bit in the third quarter with growth rate of 3.5 percent, the pace was seen strong enough to keep growth on track to hit Trump administration’s 3 percent target for the year. Butaccording to J.P. Morgan’s forecast, US economy is expected to slow down in 2019, to a pace of 1.9 percent for the year. At the same time, both Goldman Sachs and J.P. Morgan expect the Federal Reserve to raise interest rates by four times this year, causing negative impact on the growth rate.

Earlier in August 2018, a survey carried out by Zillow Home Price Expectations Survey (ZHPE) including panel of more than 100 real estate economists showed that there is 73 percent chance of a recession starting by the end of 2020, if the home value index continues to rise. The fact that in 2008 recession came as a result of housing crisis does no better for the current scenario of housing markets reaching cyclical highs. 

Although the timing of a downturn is still in dispute, many economists agree that the country’s economy is already headed towards the wrong direction. The economists expect that the growth will hold 2.2 and 2 percent in first and second quarter respectively, before falling to 1.7 percent in the third quarter and 1.5 percent in the fourth quarter. Increase in restrictions on Fiscal, Monetary and Trade policies are expected to be the primary reason behind the slowdown of Trump economy, Goldman predicted.

So what is it with the monetary, fiscal and trade policies of Trump administration and why is it being regarded as a catalyst for a slowdown and likely recession? 

Federal Reserve policies error has been the most common cause of recession in the past century. Currently, Federal Reserve has been planning to increase interest rates. When Fed raises interest rates and brings down its securities portfolio, it turns the risk of recessionary mistake as higher interest rates run the risk of costly borrowings for companies and consumers alike, hindering economic growth. 

When Trump administration relieved tax, economy started shooting up, as consumers spent more, companies invested in inventories and local governments maintained their spending. But as Forbes suggests, the tax cut benefit is now fading while there are also signs that business spending, boosted by tax cuts, is topping out. Mortgage rates have been rising and business orders on equipment are stalling out. An example is the slump of ISM’s purchasing managers’ index by 5.2 points in December, the largest fall since October 2008. Furthermore, after-tax cost of capital, which was lowered for corporation may slowly be eroded this year as a result of rising interest rates, bringing the economy back to pre-tax cut stage.

Other such trigger for a possible recession in 2020 or beyond is declining unemployment rate, according to Goldman. The bank believes unemployment rate to fall down to 3 percent by early 2020-down from 3.7 percent, pushing up wages and boosting inflation rate to 2.25 percent by end of 2019, thereby bolstering US central bank to take further action against it. Another trigger could be the collapse of international commerce due to President Trump’s trade war and tariff hikes. Thus, most of this risk is related to China. Cutting US exports to China would be a hit to the economy as it would reduce imports from China, which in turn would raise consumer prices and disrupt supply chains for American manufacturers.

In addition to the buzz of US economic downturn, OECD anticipates slowdown in the global economy. OECD lowered its global economic growth forecast from 3.7 percent to 3.5 percent stating that the global expansion has now peaked and is likely to slow over the next two years. A slowing global economy means that US economy will definitely get a hit.

However, on the optimistic side, steady growth rate basically returns to normal pace eventually. As a matter of fact, the economy’s growth was just around 2 percent in seven of the last 11 quarters, with the exception of Q2 2018. Besides, there are signs that Fed may not increase interest rates so quickly, due to plunging stock market and oil prices. Therefore, even though fear of a recession is escalating, it should be noted that it is still not on the cards, as weakening economic growth is not a direct predictor of a recession. But the concern remains that sluggish growth rate is particularly vulnerable to recession because any kind of external shock to the economy could increase the risk of the economy plunging towards a negative growth drastically. 

Senior Research Analyst, A2Z Insights

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