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Global recession fears could impact US economy, 2020 election

Specialist Glenn Carrel works at his post on the floor of the New York Stock Exchange, Wednesday, Aug. 14, 2019. Stocks are falling sharply after the bond market threw up another warning flag on the economy. (AP Photo/Richard Drew)
Specialist Glenn Carrel works at his post on the floor of the New York Stock Exchange, Wednesday, Aug. 14, 2019. Stocks are falling sharply after the bond market threw up another warning flag on the economy. (AP Photo/Richard Drew)
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The stock market rebounded Thursday after suffering its worst day of the year.

But economists remain troubled by the trends that sent stocks tumbling Wednesday as the prospect of an impending recession casts uncertainty on the 2020 presidential race.

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Global financial markets were shaken Wednesday when the interest rate on 10-year U.S. Treasury bonds briefly dipped below the rate for two-year Treasury bonds, a phenomenon investors call an inverted yield curve. An inverted yield curve has preceded the last five U.S. recessions, making it one of the more reliable indicators of economic trouble on the horizon.

“The idea is we expect as you lock up money for a longer period of time, you get a higher rate of return... An inversion is when that doesn’t hold,” explained Dean Baker, senior economist at the Center for Economic and Policy Research.

If investors are buying long-term bonds at lower rates, it suggests they expect the economy to be weaker in the years ahead, which would lead the Federal Reserve to slash benchmark interest rates.

“Why would there be a low interest rate on a 10-year Treasury note? The obvious answer is there’s an anticipation in the markets that interest rates will be lower in the future,” Baker said.

In the past, recessions have come anywhere from one year to two years after the curve inverted. That means a downturn could still be avoided, or at the very least delayed until 2021 when it would have less immediate political impact, but this development still raises serious concerns.

“It’s not isolated,” said Desmond Lachman, a resident fellow at the American Enterprise Institute. “What you’re seeing outside the United States is we’ve now got $15 trillion of bonds that are trading at negative interest rates... The bond market really fears there’s a good chance you’re going to get a global economic recession.”

One reason for those fears is an ongoing trade war between the U.S. and China that has slowed the Chinese economy and is causing growing ripple effects across the globe. President Trump maintains concerns that his trade policies will blowback on the U.S. economy are unfounded, directing his ire instead at Federal Reserve Chairman Jerome Powell, who he nominated in 2017.

“China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut. Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve,” Trump tweeted Wednesday in response to the “CRAZY INVERTED YIELD CURVE!”

However, economists say China is very much Trump’s problem, and much of the uneasiness plaguing the markets is driven by his unpredictable trade policies. Investors reacted positively Tuesday when Trump announced he was delaying some of the new tariffs on consumer goods he planned to impose September 1 until December, but China is still threatening retaliation if he goes ahead with the rest.

“We hope the U.S. side will meet China halfway, and implement the consensus reached by the two leaders during their meeting in Osaka and look for mutually acceptable solutions through dialogue on the basis of equality and mutual respect,” a Chinese foreign ministry spokesperson said Thursday, referring to Trump and President Xi Jinping’s face-to-face meeting in June.

A potential crackdown on pro-democracy protesters in Hong Kong could further complicate trade talks, which may be why President Trump urged a quick and peaceful resolution to that standoff Wednesday. If Trump and Xi can reach a deal in the months ahead, it would go a long way toward calming Wall Street’s nerves.

“I think China is pretty much the key,” Lachman said. “If the Chinese situation was stabilized, I’d feel a lot more comfortable.”

Despite the turmoil with China, many topline economic indicators in the U.S. remain strong. GDP growth was above 2% last quarter, unemployment and jobless claims are down, wages are up, and solid consumer spending has compensated for disappointing business investment data.

The U.S. economy does not exist in a vacuum, though, and numbers coming out of Europe, Asia, and South America in recent quarters have been less encouraging. Several events around the globe in the near future could have negative ramifications for the U.S., as well.

“People in the U.S., in general, aren’t focused on what’s going on abroad, and what’s going on abroad could come back to bite us pretty hard,” Lachman said.

Germany’s statistics agency announced Wednesday the country’s economy, the fourth largest in the world, contracted by 0.1% in the second quarter of 2019, and analysts expect it to continue shrinking in the current quarter, officially falling into a recession. Its economic woes are driven in part by consumers cutting back spending in China, one of its largest trading partners.

The British economy also shrank in the second quarter after weak growth in the first quarter. With a deadline to withdraw from the European Union coming in October and new Prime Minister Boris Johnson insisting he will leave even without a deal, a recession is looking increasingly likely there, too.

Italy fell into a recession last year and has seen minimal growth so far this year amid an ongoing political crisis. Argentina, already in the midst of a recession, suffered nearly a 50% drop in its stock market this week and is at serious risk of defaulting on its debts.

Several other countries are also teetering on the edge of recessions, and the drag on global supply chains from President Trump’s tariffs and tariff threats is not helping. Businesses are unable to plan or make long-term investments when they do not know if products they import and export will be subject to tariffs or what those tariffs will be.

Going forward, economists are keeping an eye on several data points that have historically presaged an economic slowdown. Those include surveys of business expectations for investment, monthly data on capital goods orders, non-residential construction activity, and car sales.

“You always look for things that give you a direct indication of future economic activity,” Baker said.

If those numbers start tilting toward a recession, political realities and the president’s own behavior may limit his options for changing the trajectory of the economy. More tax cuts or new financial stimulus are unlikely to make it through a Democrat-controlled House, and the deficit is already on track to top $1 trillion this year.

“If we do get hit with something, we don’t have that many policy instruments to deal with it,” Lachman said.

Though interest rates are still low, the Federal Reserve has some room to slash them further to mitigate softening economic growth. President Trump’s constant attacks on Powell and public demands for rate cuts may discourage the Fed from being as aggressive as it otherwise might be.

“You’ve had this peculiar situation because of Trump’s berating the Fed, I think he’s constrained their action... They don’t want to appear that they’ve turned over monetary policy to Donald Trump,” Baker said.

None of this is good news for President Trump’s reelection bid. A recession could undermine his policies in the one area where voters have consistently signaled approval even as they questioned his approach to trade, immigration, taxes, health care, the environment, and foreign affairs.

While Trump’s overall approval rating has held steady in the low 40s in most polls, he has had a net positive approval rating on economic policy in nearly every national poll conducted this year. A Fox News poll last month found the percentage of voters who believe the economy is in excellent or good condition is the highest since 2001.

However, the same poll found a plurality of voters believe economic conditions will get worse in the years ahead even if Trump wins in 2020. Nearly 40% of respondents said things will get worse if Trump is reelected, while 36% said the same if a Democrat wins. Regardless of the outcome, about a quarter of voters expect the economy to stay the same.

“He’s already in peril,” said Bob Mann, a former Senate press secretary and author of the forthcoming book “Becoming Ronald Reagan: The Rise of a Conservative Icon.” “At this point, any prospect for reelection rests on his ability to make the case that his economic policies are working. If that vanishes in a recession, I’m not sure how he sells himself for another term.”

With GDP growth stronger than many economists predicted and the unemployment rate at the lowest level in decades, Democratic candidates have struggled with economic messaging, stressing income inequality if they talk about the economy at all. A recession would validate their attacks on Trump’s trade policy and erratic tweet-driven leadership, and it would hand them an opening to pitch a rollback of his economic agenda.

“Democrats need to advance their own policies—in Congress and on the presidential campaign trail—for sustained economic growth because, even if we don’t go into a recession, the argument is still valid and persuasive that Trump’s trade policies are hurting farmers, manufacturers, and consumers,” Mann said. “The main way to avoid being seen as rooting for a recession is talk about your plan for avoiding one.”

Trump’s tweets over the last two days—furiously casting blame for any future economic downturn on his hand-picked Federal Reserve chairman and the media—suggest he is aware of how much he has riding on the economy and how likely he is to suffer politically if it falters.

“The Fake News Media is doing everything they can to crash the economy because they think that will be bad for me and my re-election. The problem they have is that the economy is way too strong and we will soon be winning big on Trade, and everyone knows that, including China!” he tweeted Thursday afternoon.

Mann is skeptical Trump’s efforts to pass the buck to Jerome Powell or any of his other favorite foils will be effective. For better or worse, the American people tend to hold the president responsible for the economy.

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“No one outside of D.C. and Wall Street knows who the Fed chair is. Everyone knows who the president is,” he said. “It’s really that simple. The public will give the president credit or blame for the state of the economy.”

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