During the recent legislative session, we warned often of unsustainable growth in state spending. Our concern then – and now – was that the strong Washington economy would eventually return to slower growth. As a trade-driven state, Washington is unusually susceptible to trade wars. So far, the state continues to outperform the nation.
Yet, as we wrote earlier, there are signs that recession risk is rising. Today’s economic news continues the pattern of mixed signals.
Some upside headlines:
Consumer spending, the primary driver of the U.S. economy, appears healthy even as other sectors of the economy, such as business investment, have weakened amid growing uncertainty over the U.S.-China trade conflict. Job growth is steady, the unemployment rate is near a 50-year low, and wages are rising modestly, which bolsters Americans’ spending power…
Thursday’s retail figures may allay some concerns about the potential for a recession that would end the 10-year U.S. recovery, the longest on record.
Greater productivity is a key ingredient in raising living standards. It enables companies to lift worker pay without raising prices on costumers. The recovery, now in its 11th year, has been held back by historically weak productivity growth. It has grown at roughly two-thirds of its historical average since the recession began.
Yet productivity has picked up in recent quarters and expanded 1.8% in the past year.
Builder confidence in the market for newly-built single-family homes rose one point to 66 in August, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. Sentiment levels have held at a solid 64-to-66 level for the past four months.
Yet, even these positive reports contain some hints of growing concern. Builders, for example, worry about regulatory costs and the lack of buildable lots.
Then, some “on the other hand” stories are more direct.
Over the past 12 months, factory production has fallen 0.5%. Manufacturers’ struggles reflect a global softening in growth that has been magnified by President Donald Trump’s use of tariffs to escalate a trade war with China. The risks have been great enough that the financial markets on Wednesday flashed signs of a possible recession. The interest charged on 10-year U.S. Treasury notes fell below the rate charged on 2-year notes, usually an indicator that investors see near-term problems that could cause a downturn.
Allen Sinai, a forecaster at Decision Economics, said that if corporate earnings slip, that could lead to less investment and then less hiring, creating a self-fulfilling process of contraction. Mr. Sinai has nudged his recession risk estimate up for the first time in years.
Already, both corporate earnings and investment are sliding. U.S. corporate profits before taxes were down 2.2% in the first quarter compared with a year earlier, according to the Commerce Department. And U.S. business investment fell at a 0.6% annual rate in the second quarter, after achieving quarterly growth rates exceeding 8% in late 2017 and early 2018…
“I think that the U.S. economy has enough strength to avoid [a recession],” Janet Yellen, the former Fed chairwoman, said…
When assumptions about how the world works are shattered, a global downturn is often the result. The world learned in the early 1970s that the era of cheap oil was over, in the early 1980s that countries could default, and a decade ago that American mortgages and global banks aren’t safe.
Today, a similar rethink of globalization is under way. From Washington to Buenos Aires, nations’ mutually reinforcing commitment to open markets is disintegrating. In response, investors are rearranging portfolios, businesses are rethinking investments and policy makers are struggling to respond—all of which are pushing the global economy closer to recession.
The number of Americans filing applications for unemployment benefits increased more than expected last week, but the trend continued to point to a strong labor market…
Therere are still no signs that a bitter trade war between the United States and China, which has contributed to an inversion of the U.S. Treasury yield curve, was spilling over to the labor market. The U.S. 2-year Treasury note yield rose above the 10-year bond yield on Wednesday for the first time since June 2007.
An inverted U.S. yield curve is widely viewed as a classic recession signal. Concerns over the impact of the trade tensions between Washington and Beijing on the U.S. economic expansion, the longest on record, prompted the Federal Reserve to cut interest rates last month for the first time since 2008.
Huseyin Gulen of Purdue University and Mihai Ion of the University of Arizona have attempted to quantify the effect of elevated policy uncertainty on corporate investment. In a 2016 paper, they show that a doubling of the level of political and regulatory uncertainty — after controlling for measures of broader economic uncertainty — is associated with an 8.7% decline in investment.
New research suggests that the trade war follows this pattern. Economists at Goldman Sachs looked at data from 70 industries, and found that the sectors with the highest share of total sales in China had markedly lower capital expenditures in early 2018, when trade tensions began to escalate. Over the previous two decades, those same industries invested relatively heavily.
Of course, if businesses are feeling more pessimistic about the trade war, they may not just delay investments (and hiring) but cut back. Many surveys show that business sentiment has noticeably darkened. Some further suggestan elevated risk of recession.
About that inverted yield curve, Erik Sherman writes in Fortune magazine,
Inversion is important because of its status as an indicator of coming economic recessions. When short-term rates are higher than long term, it indicates the potential for a future recession because the numbers indicate that investors think the short-term economy is a better bet than the long term…
“Typically these inversions occur 12 to 18 months before a recession,” said Andrew Aran, a partner at Regency Wealth Management. But an inversion is just an indicator, as in recent times, only two-thirds of them have actually come before a recession.
Uncertainty is the watchword. And, as pervasive as it is, we remain concerned about the state’s budget path.