The American Economy Bucks Headwinds, Domestic and Foreign

The international monetary Fund now thinks the global economy will grow at a 3% annual rate this year. In July, it put that figure at 3.2%. It blames the revision on barriers to trade, which are estimated by the World Trade Organization to reduce the growth in merchandise trade this year to 1.2%, the lowest level since 2009, when the global economy was in recession. The IMF is not the only forecaster revising its estimates for this year. David Malpass, president of the World Bank, expects to release a downward revision to its 2.6% growth forecast soon. The bad news is that none are increasing their forecasts. The good news is that almost none are predicting a recession this year, and few say 2020 is the year in which a recession will take hold. Some 70% of economists surveyed by the National Association for Business Economics do expect a recession to hit, but not before the end of 2021, by which time a re-elected Trump won’t much care, his or her successor will happily blame it on the prior occupant of the Oval Office, and economists will long since have revised their forecasts.

Trump, whose re-election campaign is built on claims that he has created an economy so vibrant that it is prepared to take off like a rocket, needs not only the absence of recession, but higher growth than most forecasters are expecting. If only Federal Reserve Board chairman Jay Powell were not “a bigger enemy” of the United States than Xi Jinping, and the “boneheads” at the Fed would again lower rates, even though they are already so low that the stimulative power of further cuts is much diminished, Trump believes he would get his wish. But many economists point the finger of blame for slower growth at the President. They reckon that the trade war is cutting between 0.5% and 1% off economic growth.

Differences among economists disappear when their eyes turn overseas. They all agree that headwinds from abroad are battering the US economy:

  • The eurozone is in or teetering on the edge of recession.
  • The Middle East remains close to a war that would threaten world oil supplies.
  • The export-dependent Chinese economy, hard hit by Trump’s tariffs, is slowing, and the authorities are so far unwilling to stimulate their economy by increasing debt.
  • Argentina is bankrupt, and Venezuela’s socialist economy is doing what such economies often do best: converting citizens to refugees.

America has non-trivial problems of its own. CEOs say the uncertainty created by the tweeter-in-chief has them reluctant to invest, and 65% of chief financial officers believe US trade policy will be a negative for their businesses in the next six months. The President is likely to be impeached by Thanksgiving, and Mitch McConnell is no longer promising a rapid, predictable trial in the senate. Democratic presidential wannabees are adding to the uncertainty created by Trump’s tweets by taking positions far to the left of those their party has taken in the past.

They are promising, given the chance, to unite the country — while supporting their House colleagues’ plan to infuriate about half the nation’s voters by impeaching the President. They are calling for a Green New Deal that would wipe out the fossil fuel industry (over one million workers), and a health care plan that would eliminate the entire private insurance sector (2.7 million workers). Tax rates on high earners are to be raised, a wealth tax imposed, and billionaires eliminated. Drug prices are to be controlled to roll back profits of Big Pharma, banks more tightly regulated, and corporate boards expanded to include workers.

In the face of all these domestic and overseas problems, the American economy is proving to be a resilient beast. Yes, no economy is an island entire unto itself. But Larry Kudlow, the President’s chief economist, says, “The domestic economy is strong enough to withstand a global slowdown … [it is] in very good shape … the fourth quarter and 2020 should be pretty good.” While analysts debate whether Europe is already in or is on the brink of a recession, they also debate whether the American economy will grow a bit more or a bit less than 2%, perhaps after a slow third quarter. Not bad for an economy battling headwinds from overseas and others gusting from Washington.

The main reasons for optimism, at least in the near-term, are American consumers. The University of Michigan’s consumer sentiment survey rose this month to the highest reading since July as “real income expectations rose to their most favourable level in two decades”. Retailers, whose margins seem to have been compressed by the tariff-induced increases in the prices they pay but cannot pass on, are expecting consumers to spend 5% more this holiday season than they did last year. It’s not exactly a boom — the manufacturing sector is in some difficulty — but neither is it the bust that never-Trumpers are hoping for.

One of the main sources of optimism is the important housing market, with its ripple effect on sales of everything from carpets to televisions sets, from mattresses to home-office furnishings. Sales of new homes and prospective buyer traffic are at their highest levels in over a year, and homebuilder sentiment has risen for the fourth consecutive month for the first time since mid-2014. All helped by mortgage rates that are a full percentage point lower than last year and at close to a three-year low.

Meanwhile, investors are sitting on gains of about 40% in share prices since Trump was elected, and consumers continue to benefit from lower tax rates, rising wages and an ability to job shop. Enough good news to support guarded optimism as we approach the final quarter and the new year.

If the Fed lowers interest rates for the third time in spite of the decent outlook, if the administration pushes through further tax cuts on a deficits-don’t-matter theory, and if both Trump and Xi Jining decide when they meet in Chile next month to confine themselves to jaw, jaw in the future, you can drop the “guarded”. And, cynics might add, if my grandmother had wheels, she’d be a bus.