EconoMatters, Rethinking America

The Deteriorating US Economy

Economists cannot say with precision when the next U.S. recession will begin. But there is no reasonable doubt that the U.S. economy will weaken in 2019.

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Takeaways


  • Economists cannot say with precision when the next US recession will begin. But there is no doubt that the US economy will weaken in 2019.
  • A seriously weakening US economy in 2019 could well shake Trump’s hold on Congressional Republicans and even some of his ardent supporters.
  • Trump and the GOP Congress have tried to breathe new life into the current economic expansion with large tax cuts. But they were focused too narrowly.

In all likelihood, President Trump will face a seriously weakening U.S. economy in 2019, a development that could well shake his hold on Congressional Republicans and even some of his ardent supporters.

To date, the longest expansion in U.S. history lasted ten years (from March 1991 to March 2001). The current economic expansion will match that milestone in mid-2019.

This expansion was already in its eighth year when Donald Trump took office. All business cycles expire eventually from old age, unless they are struck down early by shocks like a four-fold jump in oil prices.

A matter of when, not if

Given that we have an elderly expansion on our hands, an economic downturn in the foreseeable future is thus a matter of when, not if.

At this point in the U.S. business cycle, one should see consumers continuing to pull back on purchases of new homes and large items (“durables”). That would be the case in 2019 even if the incomes of average households had not lagged inflation over the last 20 months. But they have.

As consumer demand continues to cool, businesses will slow new investment and hiring, and overall growth will likely fall to or below 2%. At the end of that road lies the next recession in late 2019 or early 2020. That’s not exactly supportive of Trump’s aspirations for reelection to the Oval Office in November of next year.

Trump’s tax cuts were too narrow

To be sure, Trump and the GOP Congress have tried to breathe new life into the current economic expansion with large tax cuts. But their tax changes were focused too narrowly, especially on the very top of the income scale.

Moreover, they ultimately came too late to head off a recession for long anyway. Since average American families gained little from the tax changes, their consumption spending and home purchases continued to slide through 2018.

Trump’s tax law changes did goose U.S. business investment and overall growth in 2018. Even so, business investment and growth last year still lagged what was achieved at comparable points in the long U.S. economic expansions of the 1980s and 1990s.

In fact, U.S. companies spent much of their tax savings not on productive investment, but rather on a stock buy-back spree totaling some $1.1 trillion in 2018.

To see how large that is, consider that total U.S. business investment is expected to reach around $2.8 trillion this year. But most of that will go to replace worn out business structures and equipment.

Net of such depreciation, U.S. business investment totaled $504 billion in 2017 and perhaps will reach $550 billion this year. That is half of what U.S. corporations spent in 2018 to buy back their own stock!

The “yield curve”

The deteriorating outlook on the U.S. economy has not been lost on global investors. The best evidence that their confidence in the U.S. economy has waned is not so much the stock market’s recent stumbles, but rather the changes in what economists call the “yield curve.”

When global investors grow nervous about the economy’s near-term prospects, they hedge by demanding higher yields or returns for lending the government their money even for a short term.

Those changes in the yield curve are the most reliable measure economists have that a recession is coming. According to the Federal Reserve Bank of San Francisco, an inverted yield curve has preceded by about one year every U.S. recession since 1960 with only one false positive (in 1966).

The bad news for President Trump as he contemplates the seemingly certain toxic fallout from investigators in 2019 is that the yield curve has already flattened dramatically.

When he took office, the yield on one-year Treasury securities was 0.82 percent, which was 148 basis points less than the 2.48 percent yield on 10-year securities.

As I wrote this on December 27, 2018, that difference in yields has narrowed to just 20 basis points or by 86.5 percent. This is powerful evidence that the economy’s performance will be of little if any help in 2019.

Economists cannot say with any certainty precisely when the next recession will begin, nor can they predict its actual depth or duration. But economic analysis can identify with confidence the economy’s overall direction.

Based on history and the hard data on what’s happening today, there is no reasonable doubt that the U.S. economy will weaken in 2019 as it enters the final stage of this business cycle.


Average Annual Gains in GDP, Business Investment, Consumer Spending on Durable Goods and Housing Investment Over the Three Years Prior to the Last Three Recessions


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About Robert J. Shapiro

Robert J. Shapiro is co-founder and chairman of Sonecon, LLC.

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