Just a year ago I wrote that Q2 2018 was a wonderful quarter with GDP jumping 4.3 percent. However, I suggested that the hyperbole coming out of the Trump administration that we\’re roaring back to a 4+ percent growth economy was just that. Hyperbole. Most economists believed that this positive blip was a result of the new tax breaks and a minimal increase in wages, a proverbial one-off, which, indeed, it was. They believed that the blip would settle back into a 2 to 2.5 percent economy, which, indeed, it did. And since 70 percent of our GDP is consumption, the retail sector would surely be on a parallel growth trajectory, which, indeed, it was and still is. I would like to remind readers that following the 2008 crash, famed economist Lawrence Summers predicted the 2 percent economy would stick for years to come, if not forever. He called it secular stagnation.\” Read more as a precursor to this article Happy Days Are Here Again? Redux or the Folly of Fools?.
Fast Forward One Year to September 2019
So, here we are, one year later, and the drums of uncertainty and downturn are beating louder and closer. Here\’s what Axios\’ Courtenay Brown has to say about it >>
- CEOs, central bankers and money managers say they\’re operating in a world where they have no idea what\’s coming next, leaving them with few options but to prepare for the worst.
- Why it matters: Uncertainty about a handful of unprecedented phenomena – the grinding trade war with China, the peripatetic Brexit debate, President Trump\’s government-by-tweet – is inflicting pain on the global economy.
Corporate America is raking in eye-popping profits, but is in a decision-making tailspin.
- Uncertainty is now showing up in hard data: The lack of corporate dollars being spent – on factories, software or new equipment – dragged down economic growth in the 2nd quarter.
- Business investment fell 0.6% – the first drop in 3 years.
Everyone is stymied over how to make financial or investment plans, because the rules keep changing by the day.
- Businesses don\’t know what to do about their operations in China, how to price their products or source their materials. And they don\’t know how consumers will react to higher prices during the holiday season.
Central bankers are also throwing up their hands.
- There are \”no recent precedents to guide any policy response to the current situation,\” Fed Chair Jerome Powell said in a speech last month, referring to the trade war.
Main Street is grappling with a lot of questions, too – mostly about how to absorb the impact of tariffs.
- How much should mom-and-pop companies raise retail prices? Should they seek out different suppliers? Are they going to have enough to pay employees?
Consumers, too, are in a bind.
- Nobody knows what to do with their money in an environment where the stock market is a roller coaster – generally doing well, but subject to wild swings pegged partly to Trump\’s tweets. And savings accounts pay lower interest rates due to the Federal Reserve rate cut.
The bottom line: The trade war and Brexit – two fights that were supposed to be in the rear view mirror by now – have gotten even messier and uglier in recent days. So uncertainty will remain ubiquitous.\”
A Drumbeat from the Wall Street Journal
And, following is an excerpt of a warning from none other than the Wall Street Journal editorial board on 9/7/19:
Friday\’s labor-market report for August shows that job creation in the goods-producing economy has slowed to a trickle. Mining and logging lost jobs for the third month in a row while manufacturing produced a mere 3000 after only 4000 in July. This reflects declining demand for U.S. goods around the world due to slower growth abroad caused in part by Mr. Trump\’s protectionist shock to the global trading system.
The evidence for protectionist damage has been clear for months in corporate earnings reports and the declining pace of business investment, as CEO\’s cite policy uncertainty for being more cautious. And now comes statistical confirmation in a study released this week by Federal Reserve economists.
The economists did a statistical analysis of newspaper articles and earnings call transcripts to measure what they call \”trade policy uncertainty,\” or TPU. They then used that and other data to estimate the impact of TPU on economic growth and industrial production in the U.S. and the world.
\”We find that the rise in TPU in the first half of 2018 accounts for a decline in the level of global GDP of about 0.8 percent by the first half of 2019,\” they wrote. That damage would be diminishing now if trade tension had abated, the study shows.
But the economists cite the impact of a second wave of TPU shocks in the second quarter of this year. That\’s when the China-U.S. trade talks broke down amid mutual acrimony and Mr. Trump used tariff threats to coerce Mexico to reduce the flow of migrants from Central America.
The total drag on GDP from the two waves of trade tensions \”is expected to increase through early 2020, cumulating to an impact of just above 1 percent,\” the economists wrote. That\’s a big number and no mere abstraction. It\’s essentially the difference between the 3 percent annual GDP growth trend following tax reform and the 2 percent path of recent months. The Atlanta Fed is now predicting that growth in the third quarter may be a mere 1.5 percent.\”
The Final Uncertainty and Downturn Drumbeat: The Consumer
Since roughly 70 percent of the GDP is attributed to consumption, and for several years annual GDP growth has wobbled between an anemic 1.5 and 2.5 percent, what will have to happen for consumers to close their pocketbooks, thus driving the U.S. into the recession ditch?
On July 21, 2019, I wrote about how and why the 2018 corporate and individual tax breaks were an anemic one-off, not ginning up corporate investment in growth (instead, share buybacks). It also did not result in significant wage increases, and therefore no robust and sustainable consumer spending increases. In fact, the article put a spotlight on the darker fact of the hollowing out of the middle class.
Furthermore, we live in the uncertainty of Trump\’s launch of the global trade war just as the world was tipping into a significant economic slowdown, if not an outright recession. We face uncertainty as well in geopolitical conflicts altering and decimating many of the world\’s loosely held together \”norms of stability.\” And worse, huge uncertainty is caused by a lack of trust that any policy set today might be overturned by a tweet tomorrow.
All of this is just one psychological drumbeat away from finally settling into consumers\’ psyches. They are still shopping and spending today because they are the last to connect the dots on how precarious the world is around them.
But when they do, and I predict they will upon the first sound of sleigh bells jingling this winter, we\’ll hear the huge snapping sound of pocketbooks closing across America.
Although I\’m reasonably sure, I hope it\’s not the case.