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The Recession Threat Is Real

President Donald Trump and a number of administration officials are publicly downplaying the possibility of a U.S. recession in the near future, 2020 or 2021. They point out that unemployment is very low and there have been a number of solid corporate earnings reports.

All correct, but then we woke up to several concerning headlines this morning:

Reuters:U.S. Steel plans to lay off hundreds of workers in Michigan”

As we pointed out a few weeks ago, big steel has recently faced declining orders, falling prices and tanking stocks. But weren’t the steel tariffs supposed to help the U.S. steel industry? Yes, but multi-country trade wars have a way of hammering all economies, which dramatically reduces the demand for steel both here and abroad.

Wall Street Journal: An Economic Warning Sign: RV Shipments Are Slipping”

As the Journal explains: “Elkhart, Ind., is flashing a warning sign about the economy.

“Capital of the country’s recreational-vehicle industry, the northern Indiana city and the surrounding area are watched by economists and investors for early indications of waning consumer demand for luxury items, often the first sign of economic anxiety.”

Speaking of leading economic indicators, there are a couple of warning signs for a coming economic recession. One of them is the Conference Board’s Index of Leading Economic Indicators. The Index always turns negative before a recession. Sometimes it’s several months before, sometimes it’s just a few months.

June’s Index, reported on July 18, was -0.3, a decline—and the first negative reading since December. (As of this writing, July’s Index has not yet been released.) One reason was a weakness in new orders for manufacturing, which is understandable. When manufacturers aren’t sure about the future, they cut back.

Another strong economic indicator? The inverted yield curve that was discussed so much recently. That’s when the interest rate paid on long-term Treasury notes is less than the interest paid on short-term Treasuries. The inversion was brief, but it sometimes returns.

Oh, and did we mention that Germany’s economy experienced negative growth in the second quarter, and its central bank just warned the country may be slipping into a recession? As the European Union’s largest economy, if it goes into recession it’s likely the rest of Europe will also.

We do not think a U.S. recession is imminent, but the caution flags are waving.

Nor do we think recessions are inevitable. Rather, they are almost always the result of misguided policies—sometimes exacerbated by the Federal Reserve Bank, but usually caused by politicians.

In our opinion, the president’s trade wars are the primary, though not the only, cause of the current economic headwinds. If he wants to win reelection next year he will need a strong economy, which means he needs to find a way to resolve the trade wars quickly.