Post

Is a Recession Looming? (Istvan Simon, USA, 12/11/18 2:46 am)

Responding to Ric Mauricio's question, I do think that we are headed to a recession.

The American economy has been on a 10-year uninterrupted expansion, the unemployment rate is at 3.7%, and inflation is low. So, Tor Guimaraes' sweeping generalizations and enduring pessimism about the American (and the world) economy seem grossly exaggerated and probably unwarranted.

But, if so, why do I think that we are headed to a recession?

There are several reasons. First, we are due one simply by the cyclical nature of our economy. Ten years of expansion is unusually long, and so something is bound to go wrong, sooner or later, which tends to cause recessions. But there are further reasons for concern. The economic policies of president Trump are in my opinion all wrong. He has done nothing to help the economy along, and has done a lot of things that will tend to stall the economy. The tariffs and his trade war with China are stupid and counterproductive.

The United States has some legitimate complaints about some of China's trade policies and economic behavior. For example, China's tendency to ignore intellectual property. But the way to go about this is not Trump's "elephant in a china shop" (no pun intended) approach. There is no evidence that any of his tariffs have been helpful to the American economy, and plenty of evidence that they have been harmful. As I predicted in these pages, China did not blink, nor changed any of its trade practices, and entirely predictably retaliated.

It is stupid to put tariffs on steel and aluminum. It increases costs, and therefore contributes to inflation, and it makes American manufactured products less competitive, worsening the trade deficit rather than helping it. Since steel is used in mostly everything, it increases the costs of everything where steel is used. The number of jobs lost because of this is vastly superior to the number of jobs saved in the American steel industry. Similar considerations go for aluminum. Furthermore, because China retaliated, it caused the loss of billions of dollars in exports of agricultural products, and loss of market share to American agriculture in world markets. These effects are going to be long term, and persist even after Trump's policies are eventually reversed. The consequences of this Trump-manufactured crisis in the farming sector necessitated a $15 billion bailout to farmers, to try to placate them. It is 15 billion dollars that we do not have, so this just increases the national debt further. Likewise, the increase of over $160 billion in the defense budget was unneeded, and once again increases the national debt. The tax cut for the super-rich as predicted did not result in added growth, as the GOP claimed it would, and therefore once again just exacerbated the deficit. In 2 years the Trump administration grew the national debt by over 2 trillion dollars. Paraphrasing Everett Dirksen, $15 billion here, $160 billion there, and soon it adds up to real money.

It should be said that increasing the deficit during a robust economic expansion is imbecilic. It is Keynes turned on its head. It causes long-term pain with larger and larger burden of interest payments, without much economic benefit. So all these policies of the Trump administration are ill-conceived and causing real harm to the economy. Until recently this was masked by the generally good performance of the economy, which continued on its same upward path inherited from the Obama presidency. But the trade war with China and some of these other factors I mentioned above turned a vigorous bull market into what appears to be a bear market now.

I disagree with Tor Guimaraes that the rise in the stock market was caused by "cheap money." The stock market predicts future profits, and while not always right, generally does that pretty well. That is also what caused the rise in stocks so far, and it has been mostly justified. Profit growth has been healthy, and so stocks rose.

Conversely, the recent reversal of markets seems also sound. Add to this that markets do not not like uncertainty, therefore the constant zig zags of the Trump administration do not help. Neither do the constant lies which are soon contradicted by the actual facts.

JE comments:  One silver lining of a possible recession is the unlikelihood it will bring about a collapse in housing as in 2008.  Having just procured a mortgage, I can assure you the banks won't cough up a penny unless you're solvent and can prove it with forest-killing reams of documentation.

A recession is formally defined as two successive quarters of negative growth.  We haven't had one of those yet--but the fourth quarter of 2018 feels very shaky.

Visits: 97