What with the stock market and the price of oil tanking, chaotic trade policy, Brexit uncertainty, slower global growth, and the Federal Reserve raising interest rates, I’m hearing a lot more recession chatter. I tend not to go there because economists have little reliable sense as to when the next recession will hit. (Instead, I’ve stressed recession-readiness, or, more precisely, our lack thereof.)
But I’m not here to simply tell you, “Who knows?” In fact, I think there is something that we do know, or, at least, two things we should expect. First, the economy is highly likely to slow down significantly by the end of next year, and second, that is going to seriously annoy the president.
If I told you the real GDP growth rate was going to fall from 3.5 to 1.5 percent, you might not love that, but it probably doesn’t sound too scary. But if I told you growth was going to flip from 1.5 to -0.5 percent, you might run from the room screaming “recession!” Yet, in both cases, the decline in the growth rate was the same two percentage points.
I get it: Falling below zero isn’t anybody’s idea of a good time, but most people don’t think in GDP terms, and the effect of slower growth can be almost as bad as “negative growth.” For example, one thing that will happen if GDP slows as much as expected is that the unemployment rate will (after a lag) reverse course and start rising. But before I get into that, let’s talk about why GDP is expected to slow.
The reason is simple: The economy’s underlying growth rate has long been about 2 percent, but in 2018, fiscal stimulus from deficit-financed tax cuts and government spending juiced the trend growth rate by about a percentage point, which in turn has taken the unemployment rate down to an almost 50-year low.
But the stimulus hasn’t altered the economy’s fundamentals. Firms used their windfall from the tax cuts more for share buybacks and dividend payouts than for internal investment. The variable at the heart of growth — productivity — is still creeping along at about 1 percent per year. Low unemployment has clearly boosted wage growth — a welcome development — but not that much: Real, mid-level hourly pay is up less than 1 percent over the past year. All of which suggests that once stimulus fades, we’re likely to downshift back to the earlier trend.
Most forecasts are for GDP to slow from north of 3 percent to south of 2 percent. Goldman Sachs researchers recently wrote: “Tighter ﬁnancial conditions and the fading of the ﬁscal boost should slow growth from its recent 3½ %+ pace to roughly our 1¾ % estimate of potential by end-2019.” Moody’s forecast is for real GDP growth to fade from 2.9 percent in 2019 to 0.9 in 2020, a large deceleration. The Fed has GDP falling to 2.5 percent next year, 2 percent in 2020 and 1.8 percent in 2021.
Obviously, the hard numbers may turn out to be wrong, but unless Congress engages in more deficit spending, a noticeable slowdown starting late next year is the most likely outcome.
Which is why I’m genuinely concerned about President Trump’s response. 2020, need I remind you, is an election year (true, the strong economy didn’t help Trump much in the midterms, but I’m not sure this is symmetric; negative economic outcomes might hurt more than positive ones helped). He’s already tweeting his thumbs off at the Federal Reserve to stop raising interest rates, and that’s at 3.5 percent GDP growth and 3.7 percent unemployment. I’m seriously worried about what he might do if some of the more negative forecasts cited above come to fruition. A ramped-up military action — basically, a strong, impulsive, Trumpian dose of military Keynesianism — cannot be taken off the table.
Of course, Congress could spend more to offset the late-2019 slack attack, say, on an infrastructure program, but that calls for a level of bipartisanship that’s hard to envision. Also, to be clear, the current job market is very solid, meaning working families will provide our 70-percent-consumer-spending economy with a good deal of momentum for numerous quarters to come.
But while I can’t say whether there’s a recession on the medium-term horizon, I can tell you a significant growth slowdown very likely is. That would be problematic enough without such a volatile and impulsive president who has heretofore been unchecked by a complacent Republican Congress. With him at the helm, I worry where he might try to steer a ship of state that’s not sinking, but isn’t cruising along as fast as he wants it to.