By all rights, the coming year should be another good one for the economy. We are in the virtuous part of the business cycle. Unemployment is at a 50-year low, which is fueling stronger wage growth. Record open job positions combined with bigger paychecks are lifting consumers’ spirits and their spending. The robust sales are prompting businesses to expand, pushing unemployment even lower.
Supercharging this virtuous cycle is a massive jolt of fiscal stimulus. Deficit-financed tax cuts juiced up the economy this past year, and while the benefits of the tax cuts are fading, big deficit-financed increases in government spending are now in full swing. The economic boost from this stimulus is temporary, but it will add to growth for much of the coming year.
If the economy continues to grow through June 2019, the current economic expansion will turn 10 years old, marking the longest economic expansion in the nation’s history. It is hard to envisage what could stop us from celebrating this happy birthday.
Ah yes, there is President Trump. Given his wrong-headed economic policies and the political chaos swirling around him, the possibility of a recession can’t be dismissed. If not by this summer, odds are uncomfortably high that one will hit by the next presidential inaugural.
The president’s trade war is the most immediate economic hurdle. Trump appears to be searching for a face-saving way out of the conflict with China as the damage to the stock market and economy mounts. The arrangement he struck with Europe last summer and the recent new NAFTA agreement with Canada and Mexico are likely prototypes. That is, the deal will be much ado about nothing, since it will have no meaningful economic consequence.
The US relationship with China is fraught, because the Chinese steal our intellectual property and inappropriately limit our access to their markets. But President Trump’s sturm and drang won’t meaningfully change any of that. Indeed, the more he and his trade advisors rage against China, the more it will unsettle investors, stall business investment decisions, and undermine the global economy.
Then there are the president’s virulent anti-immigration views. This is very bad for business, as most companies say their number one problem is holding onto existing workers and finding new ones. Workers are quitting their jobs at a record pace, which is astounding when considering that the large baby boom generation is in its 50s and 60s, when people are reluctant to switch jobs. Labor shortages are acute across all skills and educational attainment, industries and parts of the country.
For the foreseeable future, the only solution to this problem is to allow more immigrants into the country, not fewer. Of course, that’s not happening under the Trump administration. The president has been unable to change the immigration laws, and the courts are working hard to ensure the laws on the books are followed, but Trump’s disdain toward immigrants couldn’t be clearer.
Also disconcerting is that according to the Congressional Budget Office, the nonpartisan government agency that does the budget bean counting for the federal government, the fiscal stimulus is wrecking the nation’s fiscal situation. Unless we take a quick U-turn on current tax and government spending policies, the deficit will never again fall below $1 trillion, and even this forecast unrealistically assumes there won’t be another recession.
All the fiscal red ink is a corrosive. It won’t tank the economy next year or even a decade from now, but it will steadily weaken it. Because a big deficit means the government must borrow heavily to pay its bill, all borrowers must pay a higher interest rate than they would otherwise. Businesses find it is more expensive to finance their operations, which weighs on their hiring and investment.
President Trump’s misplaced economic policies will significantly diminish the economy’s prospects in the coming year, but it is the political chaos he is creating that could do it in. In just the past few days he has attacked the Federal Reserve’s independence, cavalierly shut down parts of the federal government, and ushered out of his administration a string of senior officials and aides. Then there are the looming investigations, which appear to be coming to a head, into a long list of the president’s potential misdeeds.
It is no wonder that the longest bull stock market in the nation’s history is now at risk of dying off. To be sure, the stock market is not a fool-proof leading indicator of recession. Economics Nobel Laureate Paul Samuelson once quipped that the stock market has predicted nine of the last five recessions. This is probably one of those times when the market signal is a misfire. However, given the poor economic policies in place and the political drama in Washington that is sure to turn much darker in coming months, the next recession is coming into view.
If you enjoyed our content, we'd really appreciate some "love" with a share or two.
And ... Don't forget to have fun!