WASHINGTON: Many economists are forecasting that the US is close to entering a recession. The recession could come in 2020 but some argue it could start as early as next year. While there are a number of signs that point to that conclusion, a closer examination reveals that we are years away from a recession.
Is the stock market signaling lower corporate profits?
Those who say a recession is coming soon, point to a number of factors to support that conclusion. For instance, in the last two months stock prices have fallen by more than 10%. Since the price investors pay for a share of stock reflects their expectation of future corporate profits, the lower stock prices could mean investors expect lower corporate profits.
Lower corporate profits result from a slowing economy or a recession.
Higher interest rates coming.
The investment community also knows that stock prices tend to fall when interest rates rise. This is simply because higher inter rates attract more capital to bond markets and away from the stock market. The Federal Reserve (FED) will continue to raise interest rates because there is the fear of inflation.
But higher interest rates will also tend to slow economic growth.
The business cycle.
Economists who study the business cycle note that the US economy has a recession once every seven to ten years. There was a recession is 1981, another in 1991, another in 2001 and then a recession in 2008. The last recession ended in 2009. This means that in 2019 a full decade will have passed since the last recession ended.
Still other economists note that the relatively high growth in 2018 was due to the “sugar rush” of the tax cut. Next year, they note, the sugar rush will fade, which tends to slow economic growth.
The trade war.
Then there is the issue of the trade war that President Trump has started with China, Mexico, Canada, South Korea, Japan and the European Union. The short-term effect of the trade war is higher prices for imported goods and a decline in the sale of exported goods. Both of those actions tend to slow economic growth.
The Democrats in the House.
And finally, there is the uncertainty created by the Democrats gaining control of the House of Representatives. Since the Dems set policy based on curing perceived social injustices rather than stimulating economic growth, there is a fear that taxes could increase.
Because the GOP controls the Senate and the Presidency, it will be impossible to completely reverse the tax cuts passed in 2017. However, the Dems may tack a tax increase onto another bill. Suppose an immigration compromise results in a bill that both the Dems and the GOP will sign onto. But suppose the Dems say they will only vote in favor of the bill if there language added that raises the corporate tax rate.
Higher corporate tax rates will tend to slow economic growth.
Here’s another way to look at the indicators.
Fortunately, a closer examination of those factors reaches a different conclusion. That is, the US is probably years away from recession.
The FED will likely raise interest rates again in December. But recent reports indicate they will be less aggressive next year. In addition, while interest rates have already increased seven times in the past two years, they are still below historical averages. As such the higher rates may not be a significant drag on the economy.
Business cycle theorists may also be wrong.
Because the US just entered the expansion phase in 2018.
Typically after a recession, the economy spends a year or so in recovery before entering a four to seven-year expansion. After the prior administration set policy goals to cure social injustices the economy got stuck in the recovery stage for more than eight years.
Finally, when Trump reversed growth stifling regulations and reduced tax rates, the economy entered expansion. Since the economy has just entered expansion and expansions tend to last four to seven years, a recession in the near future seems unlikely.
Trade policy could be a drag on economic growth.
Already new deals have been made between Mexico, Canada, South Korea, and Japan. The European Union has agreed to work with the US toward a no tariff policy. And China, which is suffering far more than the US in the trade war, has started to negotiate.
By early next year, the US will have new trade deals which will open foreign markets to US companies. That will tend to increase economic growth well into the future.
Regarding the tax cut, there is no “sugar high.” The tax cut was not a one-shot reduction in taxes, but rather permanently lowered tax rates for nearly all Americans and every US corporation. That means the effects will be felt every year.
Finally, the Dems may try to raise taxes so that the tax code is “fairer.” By that, they mean setting tax policy so that they take more money away from people that earned it and give it to people who, for whatever reason, have not earned it. Trump will steadfastly refuse to sign or even veto, any legislation that attempts to do just that.
Economic growth should continue
The reasonable conclusion is, barring any geopolitical shocks, the economy should grow by 3% to 4% next year and could be higher in 2020. Trump modeled his tax cut after what Reagan did in 1981/1982, In 1984, the economy grew at about a 7 ½% annual rate.
In spite of recent fears, there will likely be no recession in 2019 or 2020.