It seems to me….
“Keynes’s contribution was not just to advocate spending government money in the middle of a recession. Every government had done that going back to the days of the Irish potato famine. What he gave to us was a way of thinking about the magnitude and the dimensions and so forth.” ~ Paul Samuelson.
The dominant mood in markets today, as it has been for much of the past decade, is not complacency but anxiety. And it is deepening by the day.
A litany of headwinds – the trade war, Brexit, slowdowns in Europe and China – are having an effect on growth. Bond yields, the yield curve, inflation expectations, and Fed-rate predictions might seem boring but they can provide important indications about the economy.
Economic warning signals are flashing almost everywhere one looks. It is most evident in the astounding appetite for the safest of assets: government bonds. Growth has stalled in Germany, Great Britain, Italy, Brazil, Mexico…. In Germany, where recent figures show that its economy to be shrinking, interest rates are negative all the way from overnight deposits to 30-year bonds. Investors who buy and hold bonds to maturity will have a guaranteed cash loss. In Switzerland, negative yields extend all the way to 50-year bonds. Even in indebted and crisis-prone Italy, a ten-year bond earns only 1.5 percent.
Investors buy government bonds because governments (normally) pay back their debts so those bonds are a safe bet. Those purchases push prices higher and when bond prices rise, the yields – or the fixed interest rates investors collect on their bond investments – fall. So, falling yields are to the economy what barometric pressure is to the weather: when they drop it’s often a sign that some kind of storm is coming.
Long-term yields on government bonds around the world have lately dropped to some of their lowest levels in recent years pushing long-term yields even lower than short-term yields. In an economically rational world, investors would demand higher interest rates on long-term bonds than they do for short-term ones as locking up their money for a longer period is usually riskier and investors are paid more for that risk. Today, in the U.S., a government bond that’s due in three months will pay a higher rate than a government bond that is due in 10 years. These occurrences, called inversions, are rare and they have grabbed Wall Street’s attention for one simple reason: they have preceded every recession over the last 60 years (although some of those downturns took up to two years to materialize).
Angst is also evident elsewhere. The safe-investment dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to $60 a barrel. One of the primary influences on the world economy has to be the U.S.’s trade disputes with the rest of the world but especially with China. U.S. central bank officials have spotlighted the persistent weakness of inflation (more on this below) and the trade war as reasons for concern.
Manufacturing firms are wary and indices of business confidence are tumbling. U.S. manufacturer growth slowed to the lowest level in almost 10 years in August 2019. Earnings growth estimates have come down drastically since last year. Analysts estimated in December 2018 that S&P 500 earnings growth would be around 7.6 percent in the coming year – that estimate is now around 2.3 percent.
An increasing number of people fear these strange signals portend a global recession. The probability of Great Britain withdrawing from the E.U. without an approved trade deal would strongly impact the British and, consequently, the U.S. as one of Britain’s primary trading partners. Until Brexit, Great Britain could be counted on to expedite trade and commerce across the Channel and veto anti-U.S. actions by other European countries, especially France.
China announced its industrial production is growing at its most sluggish pace since 2002. Investors fear that world finances are more closely resembling those in Japan laboring under a torpid economy struggling to vanquish deflation but prone to further losses.
A recession so far remains a fear, not a reality. The world economy is still growing, albeit at a less healthy pace than in 2018. Its resilience rests on consumers, especially in the U.S.: jobs are plentiful; wages are picking up; credit is still easy; and cheaper oil means there is more money to spend. There also has been little sign of any heady exuberance that normally precedes a slump. The boards of public companies and the shareholders they ostensibly serve have played it safe. Businesses, in aggregate, are net savers. Investors have favored firms that generate cash without needing to splurge on fixed assets. This is apparent in the vastly contrasting fortunes of the U.S.’s vigorous stock market, dominated by capital-light Internet and services firms that throw off profits, whereas in Europe, banks and carmakers with factories have negative capital flow. Within Europe’s stock markets a defensive stock, such as Nestlé, is trading at a towering premium relative to an industrial one such as Daimler.
While at first glance the U.S. appears economically healthy, beneath that façade are numerous cracks. The U.S.’s stock market was up 19 percent by mid-2019 and its economy created 224,000 new jobs just in June 2019, more than twice as many as needed to keep up with the growth of the workforce. Despite these strengths, anxiety could turn to alarm and sluggish growth descend into recession. Around the world investors, businesses and central bankers are grappling with a startling fact: at the end of July 2019 the U.S. economy had been growing for 121 consecutive months, the longest run since records began in 1854. The U.S.’s decade-long expansion is the oldest on record and a downturn is historically overdue but with interest rates at extremely low levels and the national debt being extremely high, the capacity to fight an economic downturn is essentially depleted. The Fed, which usually cuts interest rates by about 5 percent in a recession, will have little room to maneuver and the government will be too indebted to enact necessary stimulus spending forcing a liquidity trap scenario.
Growth is slow but more stable as activity has shifted to services and intangible assets. The 2009 recession impacted U.S. manufacturing and construction with a decline of 1.9 million jobs lost within five years following its start accelerating the shift from a manufacturing nation to a service economy. As a result of new regulations and the recent memory of that crisis, there are few signs of wild mortgage lending, over-investment, or reckless financial firms. Inflation is remarkably subdued. These forces mean that a placid expansion can continue well beyond historical norms but also suggest the way it will eventually end will be different.
Productivity growth in advanced economies has been slowing for decades, the downturn following the 2009 financial crisis raised alarms. Now, ten years following recovery from that crisis, labor-productivity-growth rates remain near historic lows across many advanced economies. Productivity growth is crucial to increase wages and living standards and helps raise the purchasing power of consumers to grow demand for goods and services. Slowing labor productivity growth therefore heightens concerns at a time when aging economies depend on productivity gains to drive economic growth. Other contributing factors include labor inputs, human capital, physical capital, and technology.
Total factor productivity (TFP), also called multi-factor productivity, measures residual growth in total output of a firm, industry, or national economy that cannot be explained by the accumulation of traditional inputs such as labor and capital. TFP is an index of overall productivity of the economy which accounts for effects in total output growth relative to the growth in traditionally measured inputs of labor and capital. If all inputs are accounted for, then total TFP can be taken as a measure of an economy’s long-term technological change or technological dynamism.
Unfortunately, following a decade of strong growth, U.S. productivity has begun to slow primarily as a result of failure to adequately invest in the basic factors of productivity. Such low or negative growth is typically seen during recessions and unusual during economic expansions.
The U.S. gross federal debt to GDP ratio averaged 62.31 percent from 1940 until 2018 but shot up to 106.10 percent in 2018. A debt-to-GDP ratio of 60 percent is normally considered a prudent upper limit for developed countries and exceeding that limit could threaten fiscal sustainability.
The NAIRU (non-inflationary rate of unemployment) is the lowest level of unemployment that can exist in an economy before inflation begins to rise. If the actual unemployment rate is below the NAIRU level for several years, the inflation rate accelerates to match the rise in inflationary expectations; the NAIRU level therefore represents the lowest level at which the unemployment rate can fall before the rate of inflation starts to rise. The Federal Reserve uses statistical models to estimates that the NAIRU level should be somewhere between 5 to 6 percent unemployment. NAIRU plays a role in the Fed’s dual mandate objectives of achieving maximum employment and price stability.
With U.S. unemployment currently having been at or below 3.7 percent, well below the NAIRU, for quite some time, inflationary pressure is building increasing the possibility of difficult to control future rapid escalation. The U.S. economy is severely overheated heightening concerns.
The U.S.is currently experiencing a high level of economic inequality as indicated by a Gini coefficient of about 41.5. The last time the country saw this level of inequality was during World War I and the depression era.
Equality, like fairness, is an important value in most societies. Inequality can be a signal of lack of income mobility and opportunity – a reflection of persistent disadvantage for particular segments of the society. Widening inequality also has significant implications for growth and macroeconomic stability, it can concentrate political and decision-making power in the hands of a few, lead to a suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk. Extreme wealth inequality breeds additional inequality and leads to a government controlled by a few, a plutocracy or oligarchy who then are able to make laws further favoring the wealthy.
Recessions used to be triggered by housing bubbles, price surges, or industrial busts. Now the concern should be about globally interconnected firms, a financial system addicted to cheap money, and a political system pushing extreme policies when political leaders feel living standards to not be rising with satisfactory rapidity.
The good news is that the trade war has so far had the most direct impact on manufacturing and commodity-related industries which now are a more moderate share of the overall economy. As of August, only 8.5 percent of American jobs were in manufacturing. The shift of the U.S. economy toward service industries over the last two generations may have left it better able to endure a global trade and manufacturing slowdown, particularly compared with export-reliant countries like China and Germany.
While an economic downturn is obviously going to occur within the relatively near future, it is not apparent when or what will be the primary cause. What is obvious is that little has been done to either prepare for it, lessen its impact, or speed recovery.
It has been remarked that “when America sneezes, the world catches cold”. Perhaps Trump has done the world a favor by partially decoupling the U.S. economy from that of other nations but any downturn will still be worldwide.
World leaders have grossly mismanaged the global economy. Heads of state from Trump to Xi Jinping have squandered the real momentum that carried over from the world’s long, post-crash recovery. Trump’s trade war and Brexit may top the list of bad policies, but China’s protectionism and India’s ethno-nationalism haven’t helped either.
U.S. tariffs are halting investment. These problems are completely self-inflicted by major world leaders who have delivered almost universally poor economic stewardship.
The most powerful anti-recession stimulus available is freer trade. Few ideas have been as thoroughly tested throughout history as the notion that trade raises a country’s income and living standards, not to mention international cooperation and peace. U.S. leaders have understood this for decades – at least until now.
That’s what I think, what about you?
 Paul Anthony Samuelson was an American economist and the first American to win the Nobel Memorial Prize in Economic Sciences. He has been called the “Father of Modern Economics” and many considered him to be the foremost academic economist of the 20th century.
 Beddoes, Zanny Minton. Markets Are Braced For A Global Downturn, The Economist, https://www.economist.com/leaders/2019/08/17/markets-are-braced-for-a-global-downturn?cid1=cust/ednew/n/bl/n/2019/08/15n/owned/n/n/nwl/n/n/na/294147/n, 17 August 2019.
 Beddoes, Zanny Minton. America’s Expansion Is Now The Longest On Record, The Economist, https://www.economist.com/leaders/2019/07/11/americas-expansion-is-now-the-longest-on-record?cid1=cust/ednew/n/bl/n/2019/07/11n/owned/n/n/nwl/n/n/na/269943/n, 11 July 2019.
 First used by Prussian diplomat Klemens Wenzel Furst von Metternich during the Napoleonic era in reference to France rather than the U.S.