Recessions in the past have com about for different and varied reasons, often dependent on the micro and the macroeconomic picture abroad and here in the States, along with the consequences of political disruptions that could have global impacts: wars, oil embargoes, and prolonged terrorism. It could be a result of over-heated markets, a glut in housing, and over-expansion in demand, resulting in an inflationary bubble and a pullback resulting in an economic contraction.
Today, the United States is literally entering uncharted financial territory. Rather than help the middle and lower classes put more money in their bank accounts, fueling the economy with more spending across the board, the tax cuts have added leverage mostly to stock prices. Meanwhile, they added to annual federal budget deficits of about $1.0 trillion and raised the National Debt over $23 trillion. Administration promises of 4-6% growth and an infusion of revenues from business expansion and repatriation of overseas dollars is and was a “pipe dream!” This added debt has put pressure on government spending.
One critical element is business investment, which could be curtailed by problems associated with international trade. Currently the economics of China and the Pacific Rim countries are slowing because of the Trump trade war, which seems to have little continuity, direction. or even logic. The giant Asian economy appears to have slowed in no small part due to stiff tariffs imposed by the U.S. in an ongoing dispute over trade rules.
Yet, the Trump White House still needs to be careful to avoid shooting itself in the foot, economists say. Although the U.S. is less reliant on trade than most other nations, imports and exports represented 34% of the economy in 2018 — up from 22% two decades earlier.
We have had tariffs on Chinese imports for over a year now, but earlier this month, Trump raised the tariff rate on a broad list of Chinese imports from 10 percent to 25 percent. He’s also threatening to nearly double the list of goods subject to the elevated tariff. That means the punitive China tariffs may soon be five times as large as they were during their first year. Already with warnings from Wall Street, Trump rolled back his threat to raise tariffs in September, and theoretically pushed it back into December. A two thousand point drop in the DJIA has a way of even catching his limited attention.
The critical element is business investment which could be curtailed by problems with a disruption in international trade. Currently with the economic slowdown in Asia, the long-term economic malaise in Europe, and the growing problem that Britain faces with no exit deal from the European Union, there could be storm clouds and choppy waters ahead.
One key indicator that has slumped last quarter is fixed, non-residential investment. As for the nation’s factories they have slowed for five consecutive months, and the July reading was the lowest since July, 2016.
As recorded by the US Labor Department, job growth the first six months of 2018, was 196,000 per month. This year, the first six months it was 172,000 per month, down 13% from 2018. In the last six months of 2016, (the Obama Administration) job growth, 209,000 per month.
There are two versions of the unemployment rate — one that’s seasonally adjusted (that’s the one that gets all the headlines) and one that’s not. The Bureau of Labor Statistics highlights the former in its communications with the press because seasonal adjustment is what allows us to compare the rate from month to month. Adjusting smooths out the predictable peaks and valleys that happen each year (such as the boom in retail employment ahead of the holidays). But if you’re not looking at change over time, the non-adjusted number can be considered a more true-to-life snapshot of unemployment in the previous month. For July it was really 4.0%
The promised Trump growth rate, of anywhere from 4 to 6%, grew at only 2.3% the last four quarters. Since 1947 through 2019 the growth rate grew at 3.21%. Of course, that factored in the great post war growth rates, along with the -10 in GDP in the last Eisenhower Recession of 1958.
Our annual deficit, with the Trump tax cut went from $585 billion in 2016 to an estimated $984 in 2019. How did those deficits effect the National Debt? It soared $2.4 trillion! Along with the growing deficits, where was the repatriation of trillions of US Dollars parked overseas? What happened to those “tax-sheltered” monies? Meanwhile, the Treasury Department said in March that the U.S. government’s deficit for the first four months of this budget year rose to $310.3 billion — a full $134.6 billion dollars more than the deficit during the same period last year. This is in spite of the government reporting a budget surplus amounting to $8.7 billion in January.
Similarly, another potential problem is the inability of corporations to make significant investments when the Federal government has an incoherent, confused, and inconstant problem regarding trade, basic economics, and budgetary excesses. In simpler terms, corporations have no clue what direction this administration is going. One day there was the threat of a 25% tariff on China, which was to go into effect in September and then in the wake of an 8% correction in one week of the market, and a 3% fall of 800 points in one day, it was pushed back to December.
Other significant problems are huge corporate debt, taken in an era of low interest rates. Today, interest rates are a shade over 2% and thus there is little room for the Federal Reserve to lower rates in case of an economic slide. In 2007, the rate was over 5%, enabling the lowering of rates to re-stimulate the economy! Right now, an elongated trade war could lead to an increase in bankruptcies that could increase unemployment and elevate a mild slowdown onto a larger contraction.
Right now, there is pressure on the retail sector. With the over-expansion of outlets, reflective of low borrowing rates, despite the middle class continuing to shrink, there is way too much dependence on low end service jobs. The tax cut increased the overall cost to all Americans of over $90 billion. With the beneficiary of the tax cut going to the upper income classes, the normal American actually paid much more than that increase.
As for the corporate tax cut, their share of the revenues into the US Treasury was previously at the lowest percentage in the past 100 years. After the full impact of the Trump tax rate cut from 35% to 21%, their contribution dropped 40%.
The last factor which could turn a mild, cyclical, slowdown into a recession is the gridlock in Washington. In 2008, Democrats approved a huge Bush Administration recovery package. This in reality, contributed to a large part of the debt accumulated in the early Obama Administration. Does anyone really believe that the democrats will bail out the trump Administration in an election year? If you do, you may also believe in the tooth fairy!