“This could be the straw that breaks the camel’s back,” Gus Faucher, chief economist at PNC, said of the ongoing trade war. “I am more concerned about the US economy now than I have been throughout this expansion.”
“You aren’t supposed to do stimulus until you’re in a recession — when you need it,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “We pulled demand forward before there was a recession, meaning we may in fact have caused the recession.”
Recession signal flashes
Shalett said the United States will likely enter a recession in 2020 and warned the global economy may already be there.
“It is highly, highly likely that the US economy will continue to slow down,” she said.
“The bond market already gets the joke. The stock market still doesn’t,” Shalett said, predicting a 10% tumble for stocks over time.
“Unfortunately, we saw a minimal short-term bump,” said Lindsey Piegza, chief economist at Stifel.
Piegza estimates there is at least a 50% chance of a 2020 recession in the United States.
Trade war dings factories
“The trade war is exacerbating it,” said Jeffrey Sherman, co-portfolio manager of the DoubleLine Core Fixed Income Fund. “A lot of it is self-inflicted.”
“At the heart of the weakness is deteriorating trade relations,” said Stifel’s Piegza.
Unemployment claims have climbed by an average of 5% in key manufacturing states such as Michigan, Pennsylvania, Ohio and Wisconsin since US tariffs on China were imposed in September 2018, according to Bank of America. Iowa’s jobless claims have jumped 16% over that span.
“Right now, we’re not looking at recession conditions,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNN Business’ “Markets Now.” “But if that manufacturing malaise moves into consumer malaise, then the chances we’re going to go in one or may already be in one go higher.”
What if the trade war goes away?
Many still have confidence the United States will avert a downturn.
A strong rebound in manufacturing would certainly lower the odds of a downturn. And that could come from powerful stimulus by China or a thaw in the trade war.
“We can reverse this,” DoubleLine’s Sherman said, “if the president turned around and got rid of the tariffs overnight.”
Although Trump’s trade war is causing trouble for the global economy, many have defended the desire to get China to play fair on trade. China’s alleged intellectual property theft and forced technology transfers have real costs.
“I’m not a fan of tariffs, but we need to find a way to push,” Solomon said.
$1 trillion budget deficit looms
Likewise, many viewed the decision to lower the corporate tax rates as a way to make American business more competitive globally.
However, the $1.5 trillion tax law wasn’t paid for, causing government revenue to decline. And Trump has enacted bipartisan agreements to ramp up government spending.
That one-two combination amounted to a strong dose of fiscal stimulus normally reserved for a recession or severe slowdown.
“It’s not the legislation I take issue with. It’s the timing of the legislation,” Piegza said of the tax law. “We were already on a tremendously dangerous trajectory.”
Trump has sought to shift the blame for a potential recession to the Federal Reserve. The president has repeatedly slammed Jerome Powell, his handpicked Fed chief, for raising interest rates. Trump now wants the Fed to slash rates.
“Lowering rates isn’t really going to solve what ails this economy,” said Morgan Stanley’s Shalett.
The good news is that even those who see a potential recession on the horizon don’t fear a repeat of the last downturn, which was the worst in a generation.
“It’s still going to cause pain but not nearly as bad as the Great Recession,” said Faucher.
He noted that US GDP plunged by 4% from peak-to-trough during that crisis, or roughly twice as much as a “normal” recession.
Of course, few saw just how disastrous the Great Recession would be until it was already too late.
One major difference is that economists don’t see an epic bubble ready to burst like the real estate and tech bubbles that popped during last decade’s recessions.
“It’s going to be a garden-variety recession. It’s not a crisis or Armageddon,” said Shalett.
“Recessions aren’t bad. We’ve lived through many recessions. There is cleansing that happens,” Shalett said.
And this cleansing may at least partially be self-inflicted.