U.S. President Donald Trump’s economic advisers do not see a recession on the horizon, but they worry that gloomy news reports and a drumbeat of recession warnings could turn fear of one into reality.
Late last week, the acting chair of Trump’s Council of Economic Advisers, Tomas Philipson, said reporters who have fixated on possible signs of a recession in bond markets this month appeared “to want people to lose jobs” and “become not economically self-sufficient.”
“As an American,” Philipson said, “you should not want a recession, no matter your political views.”
Trump’s escalating trade war is the reason economists, traders and the American public are increasingly worried about the possibility of recession. As the president punishes China with higher tariffs — and Beijing retaliates — the fight is exacerbating a global growth slowdown while dragging on investment and business confidence in the United States.
Investment has slowed this year and actually contracted in the spring, and manufacturing output has slumped. Global growth is cooling, and the Federal Reserve has cut interest rates, partly out of concern over tariff-driven uncertainty. The overall growth rate has fallen, compared with last year.
Through all that, Americans have kept shopping, continuing to power economic growth. Consumer spending increased at an annualized rate of 4.7 per cent in the spring, the Commerce Department said on Thursday, its fastest quarterly increase in nearly five years.
But one measure of consumer sentiment slipped by the most since 2012, data Friday showed, seemingly on tariff concerns: one in three respondents spontaneously mentioned the trade war.
Administration officials want to keep confidence high and are increasingly shifting blame for any slowdown on the media, Democrats and the Fed, which Trump has accused of putting the United States at a disadvantage to other countries by keeping interest rates too high.
“The way the media reports the weather won’t impact whether the sun shines tomorrow,” Philipson said. “But the way the media reports on our economy weighs on consumer sentiment, which feeds into consumer purchases and investments.”
Trump himself has raised similar concerns but has dismissed any talk of recession as improbable given the “strong” economy.
Last Friday, Trump continued his attack on the Fed as the main culprit in any slowdown, saying on Twitter, “The Euro is dropping against the Dollar ‘like crazy,’ giving them a big export and manufacturing advantage … and the Fed does NOTHING!”
He also rejected the idea that his tariffs are hurting American companies, saying any corporate pain is self-inflicted. “Badly run and weak companies are smartly blaming these small Tariffs instead of themselves for bad management … and who can really blame them for doing that? Excuses!”
Even as signs of nervousness surface, official White House forecasts, issued as recently as this summer, continue to call for growth to accelerate in the second half of this year. While bond traders, business economists and poll respondents are expressing rising concern over the health of the economy, economists independent of the White House say there is no reason to believe a recession is inevitable in the United States over the next year or so. Independent forecasts predict that economic growth in July, August and September will be about where it was in April, May and June: around 2 per cent, slow and steady.
“There really is no reason why the expansion can’t keep going,” Jerome Powell, chair of the Federal Reserve, said at his last news conference.
Many economists say that if a recession does arrive, cratering consumers will not be the root cause — and that Trump’s trade policies and the uncertainty they are stoking are the more likely culprit.
But some forecasters agree that fear itself could become a problem. Consumers drive about 70 per cent of U.S. economic activity, and if they become spooked and pull back on purchases, growth could slow more sharply. Stock market losses could unsettle Americans and cause them to clamp their wallets shut.
“If headlines about trade wars and currency wars dominate the media and the airwaves,” then “you could get in this spiral where people lose confidence and stop spending,” said Megan Greene, a senior fellow at the Harvard Kennedy School. Still, she does not expect an outright recession until 2021 in part because the labour market remains strong, making an imminent consumer pullback avoidable.
There is no guarantee the economy will crash into recession anytime soon
By several measures, the U.S. economy continues to thrive, particularly when compared with other rich countries. Unemployment is hovering around its lowest level since 1969, the job market is growing faster than many economists had thought possible and wage growth is picking up as companies compete for workers. That is leaving the average American with more money in their pocket and greater wherewithal to spend.
Despite recession chatter, consumers are likely to remain strong as long as their paycheques are growing, said Seth Carpenter, the chief U.S. economist at UBS.
“If somebody gets a raise and their spouse gets a new job, they’re still going to be spending,” he said.
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Households could keep the economy chugging along even as trade uncertainty drives companies to behave cautiously, if recent precedent holds. When growth slowed down in 2016, thanks in large part to an oil price slump that caused a drop off in business investment, America kept shopping — and the expansion continued.
For all of its importance to growth, consumers’ behaviour is historically a poor indicator of where the economy is headed. Shopping habits change quickly and often pull back only after a broader slowdown has taken hold.
“When the American consumer is strong, the expansion will have at last some momentum,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and previously an economic adviser to former vice-president Joe Biden. But “it’s harder to see around any more distant corners.”
There are some worrying signs
That is why economists monitor forward-looking economic indicators, some of which are currently showing cracks.
Interest rates on short-term government securities exceeded those on longer-dated bonds — a reliable recession indicator that suggests investors are pessimistic about the economic outlook. Trade tensions and slower global growth are weighing on business sentiment and investment, and measures tracking both factory and service industries have slowed down.
Tariffs are set to ramp up in the coming months, which could further restrain business activity. Bernstein expects the escalation that is already planned to help slow growth to 1 per cent by the second half of next year. That weakening could be painful even if it stops short of a recession, which is usually defined as two or more quarters of outright economic contraction, leading to higher unemployment and slower wage growth for everyday Americans.
“Crossing zero obviously catches everyone’s attention,” Bernstein said. “But a deceleration can feel just as bad to a lot of people.”
There is a silver lining
There is a way to keep the current jitters from taking a turn for the worse, many economists say: stop ramping up the trade war.
“The trade war is categorically the single biggest risk,” Carpenter said. He did not expect the tensions to cause a recession next year but said they would slow the economy down, increasing the risk that any surprise shock would tip off a downturn.
If growth does start to sour, walking back the tariffs could provide some relief. But once pessimism becomes entrenched, even that may not offer a quick fix.
“Just taking them off absolutely is helpful in some regard,” Carpenter said. But businesses may be slow to believe that tensions have eased, so their investment may take time to recover. “Most of the damage will have been done.”