Sooner Or Later, We Will Have A Recession

The current economic recovery is nearly ten years old. It isn't going to last forever, though, and that could pose a problem for the GOP in 2020.

By most statistical measures, 2018 has been a good, albeit not great, year for the U.S. economy. Economic growth has been strong, with Gross Domestic Product hitting above 3% on an annualized basis for each of the two most recent quarters, inflation somewhat higher than it has been in the past but still nothing that we need to seriously worry about, and jobs growth and wage growth both headed in a positive direction. To be sure, the numbers we’ve been experiencing in the past year specifically and more generally in the nearly two years that Donald Trump has been President is not substantially different from what it was during the final years of the Obama Administration. Nonetheless, compared to the economic situation in other developed economies in Europe, Japan, and elsewhere, the United States is doing quite well. Indeed, it’s worth noting that the President’s job approval rate when it comes to the economy is far better than what it is generally, is 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 set a surpass the recovery of the 1990s, but beyond that, the economic outlook is hazy and could portend problems for Donald Trump and the Republicans heading into the 2020 elections:

President Donald Trump, already in a grumpy post-midterm mood, faces a growing list of economic problems that could irritate him even more next year. Chief among them is a withdrawal from the economy’s sugar high.

Fiscal stimulus from the GOP tax cuts is likely to start running out. The Federal Reserve is expected to keep bumping up interest rates. And few analysts expect a divided Congress — facing soaring deficits and with its eyes on 2020 — to join hands and pass a big infrastructure package or sweeping middle-class tax cuts to keep the fiscal juice flowing.

The collection of all these factors, coupled with jittery investors already worried about trade wars and a global slowdown, could deny Trump the kind of big economic growth numbers he loves to celebrate. And they could undercut one of the GOP’s biggest current arguments: You may not love what Trump says or does, but the Trump economy is awesome.

“The first punch will be the lag effect of rising interest rates. Rates work slowly, but they do work eventually,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “And the second will be that by 2020, without a further package from Congress, the stimulus will be done. You put all these together and it’s a little like Wile E. Coyote running over the cliff. You look down, and the ground you thought was under you suddenly isn’t there anymore.”

The White House is well aware of the risks. Senior administration officials believe the big corporate tax cut will unleash a wave of sustainable growth in business spending that will keep the good numbers rolling — from job gains to higher wages — and keep producing GDP reports in the 3 percent territory that Trump loves, rather than the 2s or 1s that many economists expect.

But a prolonged business spending boom is no certainty, and some signals — including the third-quarter GDP report — suggest that capital investment is already slowing. So the White House is deeply engaged in efforts to boost growth through executive action, especially in the energy sector, by speeding the permitting process for natural gas pipelines and boosting the American shipping industry.

White House officials are not counting on a big infrastructure package or a deal on the kind of middle-class tax cut Trump promised at the end of the campaign.

“We’ve been noodling more on this middle-class tax cut, how to structure it, and even pay for it,” National Economic Council Director Larry Kudlow said in a recent interview in his West Wing office. “I don’t think the chances of that are very high, because the Democrats are going to go after the corporate tax and all that stuff.”

(…)

But while Trump’s advisers remain bullish, many economists are now trimming their estimates for U.S. growth next year in part because of a reduction in the impact of the tax cuts and spending increases — more than $2 trillion worth — approved by Congress and signed by the president last year.

“I expect fiscal policy will still be stimulative in 2019, but not as stimulative as in 2018,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “In round numbers, fiscal stimulus is adding maybe three-quarters of a point to GDP growth in 2018, will add maybe half as much again in 2019 and be close to neutral in 2020.”

Deutsche Bank estimates that fiscal policy will remain mildly positive in 2019 but turn into a drag of about 0.3 percent on the economy by 2020. “You should expect GDP growth to slow as we get into the second half of 2019 and in particular in 2020,” said Torsten Slok, Deutsche’s chief international economist.

The decline in fiscal stimulus will come as the Fed, much to Trump’s displeasure, is likely to keep raising interest rates in 2019. The Fed is expected to hike rates again next month and several more times next year.

The central bank’s main goal is to slow economic growth enough to prevent a surge in inflation as the labor market gets tighter. The Fed could pause its interest-rate hikes if the decline in fiscal stimulus from Congress kills economic growth entirely. But by the time it does so, the unemployment rate could be rising again.

“I’d be quite surprised if unemployment is still falling by 2020, so Trump is very likely to be running against a backdrop of rising unemployment,” said Shepherdson. He added that it is unlikely that the Fed could “magically manage to stabilize everything and freeze it where it is now and make everyone happy forever more.”

To be sure, the current economic recovery is not going to last forever. At some point, probably sooner rather than later, we’re going to hit an economic downturn. It could be a short-lived person of a two or three-quarters of negative growth that leads to modest increases in unemployment, it could be something more serious that lasts for a longer period of time, or it could be something deeper and longer lasting like the Great Recession which at one and a half years ranks second only to the Great Depression in length, although it is further down the list when measured in terms of peak job loss and the rate of decline in Gross Domestic Product. (Source) Given the fact that we are already in month 113 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.

The big question, of course, is what the political impact of all of this might be. While it’s true that the state of the economy wasn’t good enough to save Republicans from what we now have to admit was a historic Democratic wave election that flipped roughly 40 House seatso, seven Governor’s mansions, and nearly 400 seats in state legislatures around the country. If the economy ends up souring between now and the 2020 election, though, the odds are that it would end up backfiring on a Republican Party and a Republican President that would already be entering the election cycle with a historically unpopular President who will have very few first term accomplishments to point to. The closer that recession would be to the economy, the worse things will arguably be for the GOP.

FILED UNDER: Donald Trump, Economics and Business, Politicians, 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. de stijl says:

    How soon is now? DJIA, Nasdaq, and S&P went bear weeks ago.

    We’re chained.

  2. @de stijl:

    The downturn in the stock market can mostly be attributed to an inevitable correction after more than two years of shooting straight upward rather than being an indicator of the state of the economy generally. Additionally, the market is off its highs for 2018 but still well above where it was in October and November 2016. Finally, most of the downturn we saw last week can be traced to downturns in tech stocks such as Alphabet (Google), Apple, and Facebook. This is not, officially, a bear market and there’s no indication yet that it is the beginning of a long-term trend.

  3. Slugger says:

    All economic systems have short term deviations from their long term trends. If these up and down movements are modest, then they can be weathered readily. If the cycles are extreme, they can have severe effects on the lives of people. It is my sense that much of this is beyond the ability of our very limited understanding of economics to affect. I imagine that some ancient king got the credit/blame for weather leading to a good/bad harvest. I didn’t like Ronald Reagan, but during his first term when Paul Volcker slowed the economy to squeeze out inflation Reagan kept up a cheery attitude without fingerpointing or blaming. This contrasts with our current perpetually scowling Pres who is already attacking the Fed chair while things are pretty good.
    Yes, Trump is making this libby-lib-liberal miss Reagan!

  4. de stijl says:

    @Doug Mataconis:

    Hey, we’ve had a gigantic bull run for nigh on 8 years. Not to be debaser, but this too will end.

  5. @de stijl:

    I never said otherwise, I simply said that there are several reasons to believe that the current downturn in equities which, relatively speaking, is not that significant is not necessarily indicative of an immediate recession

  6. Kathy says:

    Oh, Doug, but that was before we had someone like El Dennison in control. He knows the secret to keep the economy growing indefinitely. He just has to order his economic team: Keep the economy growing, dammit! And it is done!

    Only he alone can do it!

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  7. Bob@Youngstown says:

    Disclaimer: Real people don’t buy groceries with GDP !
    The Atlanta Fed Reserve (who I think tends to be overly optimistic) is forcasting 2.5 growth for the Q4 2018. The Trump rally appears to be short lived; he and Steve Forbes were projecting sustained 4.0 + quarterly growth rates during the Trump presidency.

    OT (but related) – As a retiree my tax returns are way simple. I got my 2018 Turbo Tax yesterday and ran a projected return. A 8% increase in my RMD, coupled with new brackets and change in standard deduction (courtesy of Trump), netted me a 34% increase in my Federal Tax !

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  8. de stijl says:

    @Doug Mataconis:

    I’m basically just offering Pixies lyrics with 30% original thought. Oh, almost forgot, and one The Smiths song title.

    Seriously, this all could snap back tomorrow. But we are overdue just calendar-wise, and we are currently in a trade-war with China, and a low-key trade beef with Canada, and ditched out on our TPP obligations. And Iran. And oil. We’ve five or six things that point down.

    There is systemically a greater likelihood of recession now than in any recent time in years. Is it certain? No. Am I putting money into US equities now? Definitely not – that would be foolish. High volatility and big swings are very likely. I’m gonna hunker down into cash equivalents and hope the worst doesn’t happen.

    *I* would sell financials and tech and buy back later. (But my tech strategy is no more than 20%, so I’m very conservative.) Y’all should do whatever you feel comfortable doing – I offer no investment advice.

    My bet is we bottom at 22,000 and slowly rebound. But that is super uncertain – mid-range guesstimate. I actually kind of want it to happen nowish because it needs to happen sooner rather than later. We’ve had a monster run.

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  9. Teve says:

    he and Steve Forbes were projecting sustained 4.0 + quarterly growth rates during the Trump presidency.

    Who knew Crack was still a thing.

  10. Hal_10000 says:

    What really worries me is the deficit. It’s already hitting $1 trillion. If we have a downturn, we could have a very real fiscal crisis, possibly even a default.

    And that’s part of my general feeling about the economy. We’re doing well now. And two years in, I give Trump about half the credit for that (my rule: for each year of the Presidency, you claim 25% of responsibility or blame for whatever is going on). But it feels like the pieces are in place — high debt, trade wars, international discord, immigration restrictions — for something very very bad. Last time, as bad it was, we had other nations to prop us up. The system bent but did not break. This time … who knows.

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  11. @Doug: I think your numbers are off, as we all know the current economic conditions all started in January of 2017. I don’t know where you are getting this notion of a decade-long trend.

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  12. Guarneri says:

    @Steven L. Taylor: @Steven L. Taylor:

    I think you are forgetting that the first 8 were accompanied by a geyser of stimulating money, and the results were tepid. The last two have been a step jump in performance. The Fed will now be the biggest determinant of a potential recession.

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  13. Teve says:

    @Steven L. Taylor:

    @Doug: I think your numbers are off, as we all know the current economic conditions all started in January of 2017. I don’t know where you are getting this notion of a decade-long trend.

    I live in a low-IQ county in florida that went for trump 2-1. I never, ever read the local paper for fear of getting stupider. But in line at a coffeeshop 2 mos ago I look over and read the following: “The united states is experiencing the longest economic expansion in history. All I can say is, Thank You President Trump!”

  14. @Guarneri: “Tepid”–the basic numbers have not been especially different under Trump v. Obama. And to pretend like the tax cut wasn’t just another stimulus (and one in the middle of a healthy economy, as opposed to a massive recession) is just fantasy-land.

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  15. Teve says:

    What really worries me is the deficit. It’s already hitting $1 trillion. If we have a downturn, we could have a very real fiscal crisis, possibly even a default.

    The deficit sprung up suddenly as a direct result of huge tax cuts on the rich. In theory it could be quickly reversed if need be. But in fact the GOP voters–at least in the 4 Deep South states I’ve lived in–would vote themselves into homelessness rather than support a tax raise for any reason, and then they’d blame their homelessness on blacks.

    Greed and stupidity is a bad combination.

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  16. de stijl says:

    My first two comments were a Smith’s title and some repurposed Pixies quotes and it made way more sense than hyper-capitalist Guaneri.

    Distance equals rate times time – still works.

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  17. Just nutha ignint cracker says:

    @de stijl: I’m almost completely out of stocks at the moment. Moved everything at election time and am in bonds and cash equivalents (and I don’t trade those for the most part, just buy and hold to term) because I don’t like the volatility in the casino at the moment. The investments are growing at 3% year on year, so I’m holding my own as well as can be expected.

    The most important factor in what’s slowing down growth–beyond the greedhead corporatists running the economy–is probably that it will be difficult for tax cuts to corporations to spur increased productivity in an economy where increasing foreign trade (supposedly by forcing it with tariffs) has been adopted as the plan by a country that is, at the moment, having a better recovery than the rest of the world. The incentives for making stuff “just in case we can sell it later” are generally pretty low and people with less money still don’t buy as much as people with more. People with the most usually engage in conspicuous consumption when they expand their buying, so the long term benefit from that is still low, too.

  18. Michael Reynolds says:

    Perhaps someone more math-able than I will check this, but rough numbers:

    Before Obama was sworn in, the Dow was dropping like a rock. Within two months it had bottomed at around 6500. When he left office it was at 17,000, an increase of about 250% in 8 years. Or around 31% per year.

    When Trump took office the Dow was at about 17,000. It is now right around 25,000. That is an increase of around 50% in 2 years. About 25% per year, but all in the first year.

    Perhaps @Guarneri will explain why 25% is better than 31%

  19. de stijl says:

    @Just nutha ignint cracker:

    The investments are growing at 3% year on year, so I’m holding my own as well as can be expected.

    You just have to beat inflation – that’s it. You don’t have to “beat” anyone else. So many think it’s a competition. It’s just what you want to do with your stuff and how much risk you’re comfortable with. There really is no “wrong” answer.

    But, it is time for stormy weather.

  20. de stijl says:

    it is time for stormy weather.

    Pixies quotes still work.

  21. wr says:

    @Michael Reynolds: “Perhaps @Guarneri will explain why 25% is better than 31%”

    Because Trump is white.

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  22. de stijl says:

    @wr:

    Because Obama is black.

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  23. de stijl says:

    The Pixies – Hey (Demo 1 version)
    https://youtu.be/viaV_bSYUms

    (needs moar Kim)

  24. de stijl says:

    @de stijl:

    I actually said this earlier:

    High volatility and big swings are very likely.

    In the winter it get colder and the temperature falls.

    I’m a moron.

  25. de stijl says:

    @One American:

    only half if that.

    How does the “if that” part work?

    Is Pete Wentz black or white? Is Wentworth Miller black or white? Is Mariah Carey black or white? Is Colin Kaepernick black or white? Is Barack Obama black or white?

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  26. Leonard says:

    @de stijl: If you said high volatility without big swings, there’d e a problem. What you said was just fine.

  27. Barry says:

    @Guarneri: “I think you are forgetting that the first 8 were accompanied by a geyser of stimulating money, and the results were tepid.”

    How many months did it take for Trump to boast about that state of the US economy? IIRC, it was *maybe* 3 months into his term.

  28. Tyrell says:

    Trump messed up by talking more about immigration and other things instead of the economy.
    The people around here are finally hopeful and see a lot of improvement. There are “help wanted – apply now”. There is a lot of new construction and factories have reopened. A lot better than it has been in years. Gas is $2.09/gal at some places.
    The last thing we need is a recession.

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  29. @Tyrell:

    Trump messed up by talking more about immigration and other things instead of the economy.

    This is because he is clearly xenophobic (see, e.g., Mexicans and Muslims–he has repeatedly told us this). Further, he employed (Bannon) and employs (Miller) advisers who are clearly white nationalists (Miller in particular).

    Supporters need to accept what they are supporting.

    The people around here are finally hopeful and see a lot of improvement. There are “help wanted – apply now”. There is a lot of new construction and factories have reopened. A lot better than it has been in years. Gas is $2.09/gal at some places.

    Yes, but the point is (and has been) that the basic trend-line for the economy (GDP, employment, the DJIA) was already on a long-term direction, and the basics did not change once Trump came into office. Gas prices have been low for some time, too.

    The notion, which you seem to be promoting, that these things only started happening under Trump are simply not true.

    But yes, the economy is in good shape, especially in terms of unemployment (there are other issues that persist, such as wages).

    The last thing we need is a recession.

    Indeed, although one is probably inevitable. Of course, things like unnecessary tariffs and the irresponsible jacking up of the deficit aren’t going to help that situation.

  30. Michael Reynolds says:

    California raised taxes and has the highest income taxes in the country, God knows we do love a regulation, we are overrun by environmentalists and we now have to treat California Republicans like an endangered species and our unemployment rate is 4.2% while no-tax, no-regs, GOP-dominated Texas comes in at 4.0% , right where the nation is, as a whole.

    So tax rates, regulation and liberal Democrats give you 4.2% unemployment, and zero income tax, low regulation and conservative Republicans give you the same. It’s almost like taxes and regulation and all the other Republican shibboleths don’t affect employment.

  31. Teve says:

    @Steven L. Taylor: Also gas prices are often inversely correlated with the economy. When GWB left office, gas was like $1.79/gal because demand was low because Huge Recession.

  32. Teve says:

    @realDonaldTrump
    Follow Follow @realDonaldTrump

    So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down (are you listening Fed)!

    5:46 AM – 25 Nov 2018

  33. al Ameda says:

    @Guarneri:

    I think you are forgetting that the first 8 were accompanied by a geyser of stimulating money, and the results were tepid.

    “Tepid” = slow steady economic growth, a declining UE rate, and a declining deficit.
    That’s the kind of thing that Republicans always find objectionable.