A Slowdown, But No Recession

Late last year some 800 CEOs surveyed by The Conference Board ranked fear of a recession in 2019 19th on their list of 28 worries. Last week they ranked it first, blaming not economic but geopolitical events – collapse of the world trading system, political instability – for the construction of a new wall, this one Wall Street’s legendary “wall of worry”.

The government is partially shut down, two new Central American caravans numbering in the thousands are headed to the US border, yet the Democrats are refusing to negotiate with the President about funding a border barrier unless he first humiliates himself by surrendering to their demand that he re-open the government. In return for nothing.

House speaker Nancy Pelosi advised the President to cancel his State of the Union address, scheduled for January 29, or submit it in writing or from the Oval Office because security personnel will be unavailable during the shutdown, which proved to be untrue. The President predictably retaliated: at the last minute he ordered the military not to make transportation available for House Speaker Nancy Pelosi and a congressional delegation headed for Afghanistan and Egypt.

A fusillade of subpoenas is being aimed at the President, his family, and his staff by congressional Democrats, with Trump’s reaction unpredictable, but unlikely to be conciliatory. Talk of impeachment is in the air, with a report by Robert Mueller critical of the President a spark that would set congress to gathering faggots for the immolation of Trump. In short, chaos has come again to Washington.

Throw in mounting trade and budget deficits, a trade war on multiple fronts, a leftward, anti-capitalist lurch of the Democratic party, and a rise in climate-changing emissions that threatens the value of many investments, and no one can blame any CEO for holding back on investments until the juvenile political food-fight ends. It is, after all, impossible to predict how a President who has replaced experienced, knowledgeable advisers with his volatile instincts, and on the other side a Democratic House with the destruction of Trump its number-one priority, can possibly agree on needed policies if the economy hits serious headwinds later this year. President Trump loves creating uncertainty, even though uncertainty is an impediment to rising share prices and robust economic growth, both of which he needs if he is to be re-elected.

All in all, confused CEOs are operating in what the Consumer and Investment Management Division of Goldman Sachs, in its carefully balanced annual review, calls a “rattled world”, one in which the CEOs’ fear of a recession might lead them to cut back on investment, converting their fear into the real thing.

A recession is of course possible, but in the view of most economy-watchers the likelihood of a recession in 2019 remains low. For one thing, we are coming off a year that has left consumers and businesses in good shape. The economy grew at a rate of about 3%. Workers, especially those at the lower end of the wage scale, have begun to share in the prosperity as a tight labor market forces employers to raise wages and benefits, and Trump’s corporate tax cut gives them the wherewithal to do just that. Inflation remained tame-to-non-existent, permitting the Federal Reserve’s monetary policy committee to find new “patience” before raising interest rates. By year-end, share prices calmed down and began to leave bear-market territory.

We are, however, seeing a tamping down of profit forecasts. It seems like only yesterday that the S&P 500 was predicted to show fourth-quarter profits growth of 17%. Now, corporations are lowering their forecasts of growth in the last quarter to “only” 11%. Looking ahead to this year, Goldman Sachs expects, “with a 55% probability, … a total return of 9% for the S&P 500.” As we say in New York, that ain’t exactly chopped liver.

Still, there are real reasons for worry. The world is too much with us, and is slowing down. China’s debt-ridden economy is staggering under the weight of tariffs aimed at forcing it to abandon decades of unfair trade practices. Its total exports fell 4.4% in December even while its trade surplus with the US was the highest in a dozen years – the latter a red flag to the Trump bull. Germany, the locomotive that has been providing the energy that has kept the EU from recession, is struggling as demand at home weakens and exports to China fall. Its 1.5% growth rate in 2018 is the lowest since 2013. Worse still, with Angela Merkel set to step down in 2021 after 16 years as a political stabilising Mutti to her country and the EU, it is not clear who can assume that role: Paris is burning, Italy’s economy is stagnant, totalitarianism is resurgent in the Poland and Hungary, and Britain is Brexiting.

Add to an international slowdown the increased concern of major corporate leaders over such Trump creations as the current partial government shutdown, feared not only for its effect on economic growth, slight so far, but as a harbinger of the next move from a tweeter-in-chief who has replaced the restraining influence of knowledgeable advisers with his own instincts.

From his reading of the Federalist Papers the President undoubtedly recalls that Alexander Hamilton, a Founding Father (not the stage performer), described his opponents as having “… the rage for objection which disorders their imaginations and judgements.” Unfortunately, it is not the President’s style to adopt President Franklin Roosevelt’s policy of welcoming the hatred of his political enemies and then getting on with the job of governing. Or his opponents’ style to cut deals instead of seeking to emasculate the President. The best we can hope for is that the resilient US economy takes Churchill’s advice and KBO – Keeps Buggering On — until voters settle this standoff in 2020.