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Trade war seen among threats to US economic upturn
NEW YORK, Sept 15, 2018 (BSS/AFP) – Ten years after the fall of Lehman
Brothers helped spark the global financial crisis, the United States is in
the midst of an exceptionally long cycle of economic growth.
Most major economic indicators continue to show a green light but some
economists see warning signs.
Market watchers believe a trade war is one thing that could help make the
US economy hit the brakes.
Below is an assessment of today’s US economic outlook in green, yellow and
red.
– Green: full speed ahead –
Many key measurements are at or near multi-year highs such as those
assessing manufacturing, consumer confidence and unemployment.
Other signs of robustness include solid job growth, higher gross domestic
product and numerous stock market records following strong corporate profits.
Companies in the S&P 500 reported a 25 percent in second-quarter profits,
the biggest increase since 2010, according to FactSet.
– Orange: signs of slowing? –
As the unemployment rate has fallen below four percent, one source of
unease for economists has been the prospect of inflation.
That worry appeared to gain some traction after the August jobs report
showed a 2.9 percent rise in hourly wages, the biggest jump in nine years.
Another sign of accelerating inflation came with the July reading on
personal consumption expenditures, the highest in six years. Other inflation
data have been more benign.
In light of these trends, the Federal Reserve is expected to lift interest
rates two more times this year.
Higher interest rates could weigh on households in the form of increased
mortgage and loan payments. Even more worrisome is the prospect of a rapid
spike in inflation that hastens Fed interest rate hikes.
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“We might keep raising interest rates and the economy can’t take it and we
put the country into recession,” Neel Kashkari, president of the Minneapolis
Federal Reserve Bank, told a recent “Marketplace” radio broadcast.
Worries about interest rates have crystalized in recent months over the
prospect of an “inverted yield curve,” when short-term bond yields rise above
long-term yields, traditionally a predictor of recessions.
The yield curve has been of late closer to inversion than at any time
since 2007.
While economists watch the yield curve, some key figures, including Fed
Chair Jerome Powell, are skeptical of the indicator’s significance.
– Red: Major worry spots –
“The major risk of a recession is the trade war. It could result in higher
inflation and lower consumption as the Fed tightens its monetary policy,”
said Gregori Volokhine, president of Meeschaert Financial Services.
Of particular concern is the worsening conflict between Beijing and
Washington. President Donald Trump has threatened to impose hefty tariffs on
all Chinese exports to the United States, a move that would bruise the
Chinese economy.
Another source of unease is the cloud surrounding emerging markets that
hold large dollar-denominated debts, with Argentina and Turkey at the top of
the list.
“With their currency falling, it’s more problematic for them to pay back
any loan they have outside the country, ” said Tom Cahill, a strategist at
Ventura Wealth Management. “At some point it’s going to reverberate around
the world.”
Others raising this red flag include International Monetary Fund chief
Christine Lagarde, who has warned a sudden spike in interest rates could
shock the global economy.
Emerging economies currently hold debts of $3.7 trillion in dollars and
644 billion in euros, according to the Bank for International Settlements.
US politics is another potential wildcard for the economy, with the
prospect of a Democratic sweep of midterm congressional elections seen as
boosting the odds of Trump’s impeachment.
While it is unclear whether Trump would be forced to step down, some
market watchers think consumer confidence could be jeopardized by a
protracted impeachment.
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