Recession Watch
America’s business leaders are growing more worried that the United States will enter a recession by the end of 2020. Their primary fear: protectionist trade policy.
That is the topline finding of a report released Monday by the National Association for Business Economics. The survey, based on responses by 53 economists, is a leading barometer of where the US business community thinks the economy is headed.
“Increased trade protectionism is considered the primary downside risk to growth by a majority of the respondents,” Gregory Daco, chief US economist for Oxford Economics, said in a statement. The report found what it called a “surge” in recession fears among the economists.
The report comes as the United States ratchets up its trade war with China and has gone after other major trading partners, including Mexico and India.
I’m not sure quite what to make of these recession fears. The same survey last summer yielded the same results from economists surveyed regarding a fear of recession by 2020 based principally on trade policy. So this is nothing new. And since economists have traditionally not covered themselves in glory as a collective in predicting recession, we should take this with a grain of salt.
Negative Data
Nevertheless, the data coming out of emerging Asia and Europe point to some serious downside risks regarding China.
IHS Markit’s May final manufacturing Purchasing Managers’ Index for the euro zone was 47.7, below April’s level and only just above a six-year low in March.
In Britain, the Brexit stockpiling boom of early 2019 gave way last month to the steepest downturn in British manufacturing in almost three years as new orders dried up, boding ill for economic growth in the second quarter.
After an official gauge on Friday showed contraction in China, Asia’s economic heartbeat, the Caixin/IHS Markit Manufacturing PMI showed modest expansion, offering investors some near-term relief.
The outlook, however, remained grim as output growth slipped, factory prices stalled and businesses were the least optimistic on production since the survey series began in April 2012.
And given the increased trade tensions, trade-induced declines in global growth are probably a base case at this point. But, will it be enough to trigger a US recession?
The Yield Curve says recession
The yield curve is still a useful data point in this regard. For example, as I write this, the yield curve has inverted further still this morning. 3-month Treasuries are trading at 2.335, with an inversion straight through to 3 years, where paper is trading at 1.854. That’s almost 50 basis points of inversion, almost 10 more than I mentioned on Thursday.
Inversion is not a sign of imminent recession. Rather it is a sign of where the market believes policy rates are headed. What the inversion from 3 months to 3 years says is that the economy is headed down so fast that the Fed will have to cut aggressively in the near term to avoid recession, if it can be avoided at all.
And, indeed Fed Fund Futures are pricing in up to two rate cuts already this year – more than even odds of a rate cut in July and an almost two-thirds chance of two rate cuts at some point this year.
What that effectively means is that, if the Fed doesn’t meet market expectations, the Fed will be seen to be overtightening and we will have a credit event that brings recession on. Even if the Fed moves, the inversion suggests that we could still have a recession by the end of 2020, just as the NABE economists fear.
My view: the Fed won’t pivot enough
And though we’ve been here before in this cycle in 2015, the Fed had only just begun raising rates then. So the policy objective was to simply hold the line. Now, the curve inversion is huge. And the move being forced onto the Fed is much more aggressive. I don’t think the Fed will pivot that aggressively. And so, it will end up overtightening and creating a credit event. That’s my base case.
And that means recession by the end of 2020. So, where as I was on recession watch during the slowdown a few years ago, recession was never my base case. But, now it is.
Remember, the data are simply pointing to a slowdown at this point. Nothing in the data says recession regarding the US. All of this is predictive, speculative even. But, it’s based on experience regarding how late cycle dynamics play out and what signals to watch.
Forget about the Fed for a second here. Does Donald Trump get all of this? I say no. He thinks tariffs are going to bring his trading partners to heel. I think he’s mistaken. Moreover, an agriculture lobbyist friend I have tells me that farmers are apoplectic about Trump’s trade policy. SO, it isn’t even going to help his cause electorally. In fact, it will hurt – perhaps dramatically so, especially if it causes recession.
So, after an initial spurt of economic acceleration after the new year. reality has set in. The economy is now slowing globally. And the economic dangers have risen substantially. Trump’s policy moves are potentially the thing that tips this into recession.