The U.S. economy is likely growing at the slowest pace since President Donald Trump took office, but it is not yet heading for a recession as some fear, economists said
Worries about a global recession were fed this week by the 2018 GDP report from China, showing the slowest annual growth rate in nearly three decades, at 6.6 percent. High profile investors, like Bridgewater founder Ray Dalio, are also warning of a recession from the World Economic Forum in Davos, Switzerland.
The U.S. economy, meanwhile, seems to have slowed, though economists do not have as much data as usual because of the government shutdown. However, housing data for December showed a sharp drop off in home sales to a three-year low while consumer sentiment fell to 90.7, its lowest level since October 2016. Industrial production was strong, but ISM manufacturing activity fell to a two-year low.
“It just shows how fragile things are. If we don’t have recession this year, the odds are high that we’ll have one in the next few years.,” said Mark Zandi, chief economist at Moody’s Analytics. ” I think we’ll navigate through. As the economy weakens, political pressures will intensify and the policy makers will respond sufficiently to keep the train on the tracks.”
Dalio said on a panel at Davos, that he expects a recession in 2020, and it’s “the next downturn in the economy worries me the most.” He also said he’s concerned about “greater political and social antagonism” around the globe.
The IMF this week said it cut its global growth forecast for 2019 to 3.5 percent from 3.7 percent, pointing to the trade conflict between the U.S. and China.
Zandi said the U.S. economy is responding to a number of factors that have resulted in a slower first quarter, after a period of above 2 percent growth, back to the second quarter of 2017.
“It’s a confluence of things. One is the end of the stimulus in the U.S. That takes a lot of steam out. That affects the entire global economy,” said Zandi. “Part of it is the trade war. That’s doing damage all over the world including the U.S. and that’s accumulating over time. Then you have the government shutdown, which is very corrosive on the economy and it’s starting to take the steam out.”
Economists have expected the U.S. economy to slow as fiscal stimulus wears off this year, but the Chinese economy is also being hit by tariffs and the trade war, in addition to an intentional effort to curb leverage. Fourth quarter GDP for China grew at 6.4 percent, the slowest quarter since the financial crisis.
“The economy’s growth is weakening. The economy is very wobbly, and right now growth in Q1…it feels like we’re below potential, below 2 percent,” said Zandi. Zandi, for now, is not currently changing his forecast for 2.5 percent growth this quarter.
“In the first quarter, one of the big issues is going to be the government shutdown. Our forecast is just above 2 percent, depending on where this goes, that certainly could push it somewhat below 2 percent,” said Don Rissmiller, chief economist at Strategas. Rissmiller said the shutdown is not a big negative for the economy, but it could be a factor, which would reverse with a bounce back once it ends.
The government shutdown, now in its fifth week, is expected by Trump administration officials economists to shave about 0.1 percentage points from growth per week. But the shutdown has also made it impossible to tell what’s really going on with the economy, since there have been no reports on retail sales or inventories.
“Even for the first quarter, we have some expectations of slowing, but it’s hard to imagine it’s going to crater,” said Kevin Cummins, senior economist at NatWest Markets. “Job growth in December was over 300,000, and the unemployment rate is still below 4 percent. It does seem the fundamentals are still in pretty decent shape.”
Economists expect the fourth quarter grew at about 2.9 percent, and Cummins said the first quarter’s pace likely slipped to about 2 percent.
“It’s hard to say if consumption is rising at 3.75 or maybe as high as 4.25 [percent]. The lack of data on trade and inventories can have sizable impacts on GDP prints. Will this data unavailable, the jumping off point for Q1 is unknown,” Cummins said.
Economists are watching jobless claims, which have remained low and the employment report.
“I’m expecting to see some weakening. We had a significant jump in December. We’re going to see a softer number, something well below 200,000,” said Zandi. “I do think all these things are going to weigh on job creation.”
Zandi said a key number to watch in the future will be the unemployment rate. “Once it starts rising, then you’re very vulnerable…If the unemployment rate rises by more than a quarter pint in a three month period, that’s the vicious cycle. If that happens, you’re in recession,” he said.
The unemployment rate rose to 3.9 percent in December from 3.7, due to an increase in the labor force, and it could dip again.
Cummins also said some of the negatives in data could be reversing. For instance, the slowdown in housing may be temporary and a response to higher mortgage rates, which have since come down. Mortgage applications jumped more than 13 percent last week.
One big fear was that the Fed would engineer a recession by raising interest rates too much, but the Fed has adopted a more dovish tone and has stressed that it could pause in its rate hiking.
But China’s slowdown remains a concern since it could chill the world economy.
“I’m not putting up the white flag on Q1 growth yet,” said Zandi. “[The Chinese economy has] really come off. It’s hard to know what their GDP number is. It’s not 6 percent. It’s probably closer to 4 percent. To them, that feels recession-like. That’s clearly evident in their data— vehicle sales, trade data, exports and imports.”
Zandi said China’s slowdown accelerated in December and January.
“I think China wanted to maintain growth and its growth targets but it took on structural problems, most notably its leverage. I think Chinese authorities thought they could pull that off, restraining credit growth but providing enough domestic support,” he said. “Obviously they couldn’t. I think it got very complicated with the trade war. That made it untenable. They were trying to pull off a tricky policy and [the trade war] blew it all apart.”
