Economic Storm Clouds On The Horizon

The economy is in good shape for the moment but there are storm clouds on the horizon.

Statistically speaking, 2018 has been a pretty good year for the American economy by whatever measure you choose to by. As measured by the Commerce Department’s quarterly reports of Gross Domestic Product, with annualized growth exceeding 3% on an annualized basis for both of the two most recent quarters. Both consumer and wholesale inflation, while somewhat higher from where it had been in recent years, remains under control. The job market, while not exactly booming, is strong according to the most recent Jobs Report while wage growth, which had been stubbornly stagnant for some time, appears to be finally moving in the right direction. Perhaps most importantly, consumer confidence and other measures show that the American public remains largely positive about the state of the economy. The best measure of this from a political standpoint can be seen in the fact that  that the President’s job approval rate when it comes to the economy is far better than what it is generally, a sign that the economy is doing fairly well, although as I noted that did not help the GOP in the recent midterm elections. As I’ve noted before, the period of economic growth that we are currently experiencing began in June 2009 and has lasted 113 months, making it, to date, the second longest economic expansion in American history. The longest post-World War Two expansion took place between March 1991 and March 2001, a period of 120 months. (Source) At current trends, it seems likely that the current expansion will last at least long enough to surpass the recovery of the 1990s,

Even in the face of all this good news, though, the storm clouds for the economy are gathering:

WASHINGTON — Emerging signs of weakness in major economic sectors, including auto manufacturing, agriculture and home building, are prompting some forecasters to warn that one of the longest periods of economic growth in American history may be approaching the end of its run.

The economy has been a picture of health, expanding at a 3.5 percent annual pace during the third quarter and driving the unemployment rate to 3.7 percent, the lowest level in almost half a century. But General Motors’ plan to cut 14,000 jobs and shutter five factories reinforces other recent indications that the better part of the expansion is now in the rearview mirror.

“We’re in the 10th year of the expansion and there are some soft points,” said Ellen Hughes-Cromwick, a former chief economist at Ford Motor Co. and the Commerce Department who is now on the faculty at the University of Michigan. “The auto sales cycle has peaked and the housing cycle also has peaked.”

Ms. Hughes-Cromwick said higher interest rates, combined with rising inflation and faltering corporate confidence, could set the stage for a recession. In that scenario, she said, “I don’t really see how the economy can keep powering ahead.”

The vast majority of prominent economic forecasters, including various arms of the federal government and all of the major Wall Street banks, still regard continued growth as the most likely outcome for the American economy in 2019. But there is a broad consensus that the pace of growth will slow as the sugar high provided by the Trump administration’s $1.5 trillion tax cut and spending increases begins to wear off. And some forecasters see a small, but growing, chance of a recession.

President Trump’s chief economic adviser, Larry Kudlow, tried to play down such concerns on Tuesday, insisting that the overall health of the economy remained robust.

“There’s a certain amount of pessimism I’m reading about, maybe it has to do with a mild stock market correction,” Mr. Kudlow said, before describing such pessimism as misplaced. He rattled off recent economic data — including the most recent jobs report, which he described as “very spiffy” — to highlight the strength of the American economy, before his conclusion: “We’re in very good shape.”

Jerome H. Powell, the Federal Reserve’s chairman, has also taken an optimistic line, declaring in Texas recently that he was “very happy about the state of the economy.”

The basic cause for concern is a widening gap between the evident strength of the economy this year and weakness in economic indicators that look ahead to coming years. That gap was highlighted Tuesday in the latest data on consumer confidence, which showed Americans remained pleased with their present circumstances, but were less confident that growth would continue.

Investors are showing signs of concern about the ability of the corporate sector to maintain sky-high levels of profitability. Major stock indexes are roughly flat for the year.

Some businesses are starting to worry, too. Farmers are facing large losses because they cannot sell crops to China during a trade war between Washington and Beijing. Sales of new and existing homes have declined in recent months as interest rates rise. Auto sales, also vulnerable to higher rates, have been falling since 2016.

“This is a geriatric expansion,” said David Kelly, chief global strategist at JPMorgan Funds.

Mr. Kelly noted that if economic growth continued through next summer, this would become the longest-running expansion of the American economy since at least the Civil War.

To be fair, the fact that an expansion has been going on for an extended period of time does not necessarily mean that it is any more vulnerable to being pushed back into recession than it was at the beginning stages. That being said, it’s worth noting that the factors that drive economic growth do tend to become more difficult to stimulate as time goes on, and thus become more vulnerable to forces which could push the economy into recession. Jobs growth tends to slow down, for example, because there simply are fewer people competing for jobs and fewer people available or qualified to be hired for specific positions. Ordinarily, of course, this puts upward pressure on wages, although as I’ve said that’s something we haven’t seen in the course of this recovery to quite the extent that either economists or workers would like to see. Additionally, as the economy grows it becomes more likely that a combination of the impacts of fiscal and monetary policy will push the economy into recession, or that some outside force such as an international crisis or natural disaster will do so. Finally, as many economists have noted recently, the short-term economic stimulus provided by last year’s tax cut package is already beginning to wear off, meaning that we’re likely to see economic growth head back down to the 2.0% to 2.5% growth range that we’ve seen for most of the time since the summer of 2009 when it began. This will serve to make the economy more vulnerable to a downturn due to any of the number inside or outside sources already noted.

Given the fact that we are already in 113th month of a recovery that began nearly ten years ago, and that we are just seven months away from the point at which the current recovery will tie the longest such recovery in American history suggests that it’s far more likely that we’re close to the beginning of another recession than it is that we’re headed for a period of economic growth that, quite honestly, is usually only seen in the early years of a recession when the economy is making up for ground lost in the preceding recession. Were the current recovery to last until the 2020 General Election, that would mean that it would be 137 months old. While it’s certainly possible that we’ll see this, the odds are that we won’t. At the very least, it’s likely that we’ll see economic growth slow back down to the 2.0% to 2.5% range that we’ve seen for most of the recovery and that we aren’t going to get anywhere close to the sustained 3.5% to 4.0% growth that Republicans promised we would see from last year’s tax cut.

At some point, then, this current recovery is likely to end. At that point, the question will be whether we experience a relatively short recession such as those we experienced in the early 1990s and early 2000s or whether it ends up being something deeper and more widespread such as the Great Recession. Statistically speaking, most post WorldWar II recessions have tended to be short-lived, so it seems likely that this is what we’re likely to see in the future. At the same time, though, it’s possible that many of the bad habits we’ve developed over the past decades, such as increased government, business, and consumer debt, will lead to something more painful. Whatever it is, we better be prepared for it whether we want it to come or not.

FILED UNDER: Economics and Business, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. gVOR08 says:

    The Yield Curve Flipped. Not a good sign.

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  2. grumpy realist says:

    (raises hand) Yeah, am getting pushed out at the end of the year. Luckily have enough stashed aside that this is not a problem.

    Get ready for the deluge, boys!

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  3. Daryl and his brother Darryl says:

    As gVOR08 notes, the yield curve flipped…also the trade deficit is up, and housing is down.
    I can’t wait for Individual #1 to start blaming Obama.

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  4. Teve says:

    Not many trolls around lately.

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  5. Jen says:

    I’ve seen quite a few local businesses closing, which was surprising to me as it seemed out of the blue. There are also plenty of news stories out there about personal debt being at an all-time high–which, combined with rising interest rates, would make this a less than ideal time for anyone carrying adjustable-rate debt to be out of a job.

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  6. Michael Reynolds says:

    It’s hard to stimulate the economy when the people with all the money don’t need to buy anything, while the people who need to buy stuff have no money.

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  7. grumpy realist says:

    @Jen: one of the reasons I’ve been paying down my HELOC like mad.

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  8. MarkedMan says:

    I’m pretty sure your GDP growth number does not take inflation into account. Calculating growth without inflation is a futile exercise. Inflation affects things. A loaf of bread no longer costs 12 cents. Minimum wage is no longer $1.65/hr. The Buick my father bought for just under $4K is no longer feasible. And McDonalds no longer advertises that you get change back from your dollar when you buy a burger, fries and a coke.

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  9. MarkedMan says:

    Well, this is embarrassing. I accidentally lost my “edit” capability and I find that the 3% looks to be on track as an inflation adjusted number. Right up there with Obama era growth…

    Please ignore the non-nostalgia portions of my post above.

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  10. Kathy says:

    @Daryl and his brother Darryl:

    I can’t wait for Individual #1 to start blaming Obama.

    I hope he does.

    The alternative, which is even smart, at least as far as keeping his base not too unhappy, is to blame the Democratic House. After all, the slowdown/recession will take place on their watch, and he can blame them for not passing all the legislation that was never proposed.

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  11. Daryl and his brother Darryl says:

    @Michael Reynolds:

    It’s hard to stimulate the economy when the people with all the money don’t need to buy anything, while the people who need to buy stuff have no money.

    My biggest fear with Individual #1 was always that he would do what he campaigned on; a huge tax cut for the middle class and health care for all. Had he actually done that, Republicans would be in power forever.

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  12. Sleeping Dog says:

    Economic growth in Asia, particularly China, has slowed. European economic growth has slowed. Predicted US growth is downward for 2019. Not many sunny forecasts out there. Trump has raised taxes on the middle and lower income individuals via tariffs, the current national debt, means it will be difficult for Congress to pass a stimulus package and while the Fed is raising interest rates, they are still pretty low and limits the Feds ability to stimulate the economy through interest rate manipulation.

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  13. gVOR08 says:

    @Daryl and his brother Darryl:

    also the trade deficit is up

    To a ten year high. As Dr. K said, so much winning.

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  14. Gustopher says:

    And, with a massively increased deficit in good times, when the recession does inevitably hit, we are likely to try to austerity our way out of it.

    It’s as if all the lessons of Japan’s lost decade have been lost.

    How hard is it to remember: Modest austerity in good times, massive spending in bad times. See the government to soften the economic cycle, not amplify it.

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  15. Gustopher says:

    @Gustopher: use the government, not see the government. That latter makes no sense. I blame autocorrect.

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  16. Mister Bluster says:

    Screw nostalgia!
    My FICA benefit netted me a one dollar ($1.00) monthly increase for 2018.
    There was zero ($0.00) increase in 2017.
    I was just informed today that my monthly benefit net increase for 2019 is a whopping $37!
    That’s a full tank of unleaded regular per month at $2.24/gal!
    One round trip from Sleepytown to Hannibal MO!
    Happy Days are Here Again!

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  17. grumpy realist says:

    Well, I’ve already taken a lot of growth off the table, so can sit pretty comfy for a while regardless of how panic-stricken the retirement planning person at the bank gets. If all goes to pot will head off to somewhere rural and start a brewery. Everyone always needs booze, good times or bad.

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  18. EddieInCA says:

    As some here will remember, I proclaimed in February that I was fully in cash at the time. I sold every last stock I owned end of January of this year. Since then. my money in my 401K and IRA have been 100% cash, making less than 1% for the year. I’m old enough to know a bubble when I see it. I’m saving my cash for the ineviteble housing crash, followed by the whole market crashing again. Won’t be as bad as 2007, (some people haven’t recovered from that yet), but it will be bad.

    Who would have thought that buying a place in Mexico would give me a greater yearly appreciation than a house in the USA, but that’s what happened to me since 2016.

    It’s going to be ugly, and the worst ones hit will be the Trump voter, unfortunately for them. Of course, they’ll blame it on Obama, the Deep State, the Elites, and the “others” taking what’s theirs.

    It’s going going to end well.

    BTW, I wounder how many of those Ohio Trump voters I rent to through Ohio and Florida LLCs realize their landlord is a far-left, almost socialist, elite from Los Angeles and New York.

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  19. EddieInCA says:

    @grumpy realist:

    Well, I’ve already taken a lot of growth off the table, so can sit pretty comfy for a while regardless of how panic-stricken the retirement planning person at the bank gets. If all goes to pot will head off to somewhere rural and start a brewery. Everyone always needs booze, good times or bad.

    Look at Mexico, rather than a rural USA locale. I bought in San Miguel deAllende. Anyone who wants to retire well should consider Mexico, Ecuador, Costa Rica, or Columbia. There are some amazing Expat communities.

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  20. Slugger says:

    I believe in America. Every economy goes through ups and downs, and these can be very painful. A young person starting now with significant student loans faces real problems, but in the long run over a ten to twenty year horizon things will turn out. Yes, there will be rough spots. Adaptability will always be an important strength. If some genie were to offer me the chance to be broke, 25 years old, and healthy in return for all my worldly goods, I’d take the deal in a heartbeat.

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  21. EddieInCA says:

    @Slugger:

    I believe in America. Every economy goes through ups and downs, and these can be very painful. A young person starting now with significant student loans faces real problems, but in the long run over a ten to twenty year horizon things will turn out. Yes, there will be rough spots. Adaptability will always be an important strength. If some genie were to offer me the chance to be broke, 25 years old, and healthy in return for all my worldly goods, I’d take the deal in a heartbeat.

    Slugger – I genuinely believe you believe it, and I envy you for it. Until about 2008 I felt the same way. However, when Obama was elected and the whole birther stuff started happening, I started realizing that more of my fellow citizens were racist, homophobic, xenophobic than I ever suspected. As the Obama presidency continued, my shock turned to sadness.

    The election of 2016 convinced me that we’re heading for a civil war. I may not live to see it as I’m 59 years old, but it’s coming. It will be a war between the educated and the non-educated. Between the racist and the non-racist. Between the smart and the stupid.

    Am I being overly dramatic? I don’t think so. Am I being cycnical? Hell yes. Because 2016 showed me that 30% of this country doesn’t care about honesty, institutions, religious consistency, democracy, and the American way.

    There is NOTHING more unAmerican than what the legislatures in NC, WI, and MI are attempting to do, and yet they have the support of their party. There is no outrage. There is no intellectual honesty. It might be legal – as our own Mr. Macatonis is fond of saying (and in his mind that’s all that matters), but it certainly isn’t fair, just or going with American norms.

    A war is coming. I’ll sit it out in Mexico, thank you, when that time comes.

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  22. Just nutha ignint cracker says:

    @MarkedMan: Don’t beat yourself up. Even with inflation adjustment, the aggregate data fail to show disproportions in the distribution of the growth so that while “everyone (in aggregate) is doing better” most of us (as individuals) aren’t.

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  23. Just nutha ignint cracker says:

    @Kathy: Boom! [mike drop]…

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  24. Just nutha ignint cracker says:

    @Gustopher:

    It’s as if all the lessons of Japan’s lost decade have been lost were never considered in the first place.

    FTFY.

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  25. Just nutha ignint cracker says:

    @Mister Bluster: A guy that I used to work with grew up in the depression and explained it to me by noting

    In some ways, the period was great; I mean, you could buy a pork chop for a nickel. Of course, you had to have a nickel, but if you did, you were fine.

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  26. Kathy says:

    @EddieInCA:

    A war is coming. I’ll sit it out in Mexico, thank you, when that time comes.

    War or not, we can set up an OTB group in Mexico.

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  27. gVOR08 says:

    @EddieInCA:

    The election of 2016 convinced me that we’re heading for a civil war. I may not live to see it as I’m 59 years old, but it’s coming. It will be a war between the educated and the non-educated. Between the racist and the non-racist. Between the smart and the stupid.

    I may be more hopeful. People don’t vote on policy, they vote on some sort of perceived tribal alliance. When I was young it was sort of capital/labor, north/south, city/country (with the southerners and farmers being Ds). The GOPs have been very successful in making it white/minority, evangelical/secular, south/north and country/city (with southerners and farmers now being Rs). But I keep wondering if Trump is driving another shift. The new tribes seem to be what you describe as sides in a civil war. I’m hoping it’s really a new tribal alignment for elections, basically urban/rural, with Rs getting the rural tribe vote. (Which is like 15% of the electorate.)

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  28. One American says:

    Why can’t we just enjoy it while it lasts without all the doom and gloom here?
    My boss emailed me today that we are getting a nice Christmas bonus, cheers!

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  29. grumpy realist says:

    @One American: Because I just lost my friggin’ job? As a Russian bot, you don’t even have enough AI implemented to “understand” what I wrote, do you?

    Either you’re a Russian bot or someone who doesn’t understand written English. In neither case do you deserve to be listened to.

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  30. t says:

    @EddieInCA:

    I’ll sit it out

    typical boomer

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  31. KM says:

    @One American:

    Why can’t we just enjoy it while it lasts without all the doom and gloom here?

    Because drinking gin and tonic on the deck of a sinking ship is stupid, if not suicidal. Yeah, there’s nobody at the bar so you don’t have to wait but there’s a frigging reason for that. If you wait till the water’s lapping at your ankles, you’ll find all the lifeboats gone and some very icy water to learn to swim in……

    Smart people don’t “enjoy it will it lasts” because they’re busy preparing to survive the coming sh^tstorm. When it’s over and idiots like you are gone, then they’ll drink your gin and enjoy not having their lives totally ruined.

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  32. just nutha says:

    @KM: You bring up an interesting point. Years ago in an Esquire article, Andrew Tobias suggested that the best way to achieve financial security was to live below your means as much as possible. In the article, he noted that, indeed, if everyone followed that advice, the economy would surely collapse, but went on to explain that the reason the plan works is because most people will refuse to live below their means. Those people will “just enjoy it while it lasts without all the doom and gloom.”

    So I would like to thank @One American for her contributions to my personal financial security. Keep up the good work and God bless you!

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  33. grumpy realist says:

    @just nutha: Well, somebody gotta buy all those lottery tickets…

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  34. One American says:

    @grumpy realist: well suck it up buttercup and just scroll past my posts. I survived the barry years and I hope you find your happy place. Your Russian bot is certainly boring to me as I am in Pearl Harbor survivor country. Aloha

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  35. One American says:

    @KM: idiots like me? Go plan your life, I will do the same, leave me out of you misery. Mahalo

    ReplyReply
  36. grumpy realist says:

    @One American: Yeah, definitely a Russian bot. What you just posted isn’t even English.

    ReplyReply

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