Whose Recession is it Anyway?

In the movie classic, “The Wizard of Oz”, as the Wicked Witch melts after being doused with a bucket of water, by the saucy, and ever brave, Dorothy Gale from Kansas, she exclaims, “What a World! What a World!” and  this seems to sum up financial news from the US these past few days, as a worried President Donald Trump pooh-poohs the idea of a recession, in the absence of any real data. And, as much of the world knows, that has never stopped him before.

What is news is that the long predicted, and curiously much desired by some, recession is not just around the corner and not being released from Pandora’s box, but economists, in a recent survey did waffle a bit, with some saying, in effect, hang on it’s coming, to others saying, with a shrug, not to worry, leaving many to wonder what is really going on.

It’s not too hard to imagine that Trump is worried that his signature plank in the 2020 election platform might be crumbling and NBC’S Morning Joe capsulized that with news of closed door meetings, on the topic, but it also shows, once again, a certain amount of naivety about his own actions, and number one is the Chinese tariffs that he imposed threaten a recession, not simply in the US, but also a global reaction.

“I don’t think we’re having a recession,” Trump told reporters Sunday, according to the Associated Press. “We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut, and they’re loaded up with money.”

Circling back to what economists have said, we have some that give it a greater chance than some believe, and “Nearly 3 out of 4 economists surveyed by the National Association for Business Economics expect a recession by 2021, according to poll results released Monday. The outlook reflects growing skepticism among economists and investors that the U.S. economy will be able to withstand a protracted trade war with China without serious harm amid a weakening global outlook,” reported The Washington Post.

Leading the pack is “Hedge fund manager Ray Dalio, the founder of Bridgewater Associates, told CNBC last week that he now believes there’s a 40 percent chance of a recession before the 2020 election. In February, he had estimated that figure to be 35 percent.”

While 74 percent of economists in that survey said they expect a recession by 2021, the data seen is less than comprehensive and none of them can say that the president is wrong, and there is some serious waffling, with Michelle Meyer of Bank of America saying in a private note to investors that she sees only a 20 percent chance; she then does a quick turnaround and says subjectively there is closer to a one in three chance of a recession.

"Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance,” as reported by CNN.

If that is not soothing news, then let’s hear this: “It's important to note that others have sounded more optimistic -- including Goldman Sachs chief executive David Solomon, who told CNN in an interview last week, "I think at the end of the day, the underlying economy, as we discussed, is still doing okay. I think the chance of a recession in the near term is still relatively low. But we have to watch what's going on with tariffs."

Harkening back to undergrad macroeconomics, and even basic statistics class, we have the following to reflect on: “Caution is warranted. The survey period mostly took place before the Federal Reserve cut interest rates on July 31. And NABE simply distributes the survey to 1,780 members of the organization, regardless of their level of experience or their position, then tallies the responses of the people who choose to participate.”

For those in the know, what CNN is saying is that this was a small sample n=1780, skewed to a restricted population, and that the methodological results give caution due to multiple variables.

If you raised your hand to say, “yes” - then that is the best answer you can give, and we will award you bonus points for class participation.

Trump has tried to soften the blow from the tariffs, by saying that further actions will be delayed to December, and add a cut in payroll taxes, not, as many have noted, as President Obama did to stimulate the economy, but to soothe worries from his political base; and, remembering that despite enjoying some off-time to write his memoirs,  the former president is still on the 2020 ticket, for those who care.

What needs to be remembered is to view the US in the context of global economics and that Trump’s actions, and statements can affect world markets.

To that effect, while America's economy has grown by the end of this past month, for 121 months; but, what follows it is a jumble of contradicting information: 224,000 jobs created last month, yield curve inversions as the rate of return on long term investments begin to shrink and a wary manufacturing base, and while The Economist correctly identified this, as to be expected, much of “it is also owing to deeper changes in America’s $21trn economy.”

While we are spared, all but the memory, of derivatives, there is more than one conundrum, with average GDP, 2.3 percent, “much lower than the 3.6% that was seen in America's three previous expansions.”

Combine that with an ageing workforce, and retiring baby boomers that has de-escalated the workforce, plus slow productivity and “Big firms [that] hoard profits and invest less,” then there are further problems despite the good news of less energy and less reliance on manufacturing, and an increase in services.

We have something further to talk about: the good tempered by low wages that have crawled to a weak 3 percent, and more is needed than an explanation, from Trump, or the proclamation from another Hollywood movie heroine, Scarlett O’Hara, who shouted, in “Gone With the Wind” that “We’s rich!”

The specter of a weakened supply chain shaken, not stirred, by the trade war makes investors even more nervous, as does the rate of total private debts at 250 percent of the GDP.

Finally, both policy and politics are sitting on a seesaw, and “the greatest threat to America’s long and placid expansion is that of a new era of wild policy may just be beginning.”