For the U.S. Economy, Storm Clouds on the Horizon
By Binyamin Appelbaum, New York Times Nov. 28, 2018
WASHINGTON — Emerging signs of weakness in major economic sectors, including auto manufacturing, agriculture and home building, are prompting some forecasters to warn that one of the longest periods of economic growth in U.S. history may be approaching the end of its run.
The economy has been a picture of health, expanding at a 3.5 percent annual pace during the third quarter and driving the unemployment rate to 3.7 percent, the lowest level in almost half a century. But General Motors’ plans to cut 14,000 jobs and shutter five factories reinforces other recent indications that the better part of the expansion is now in the rearview mirror.
“We’re in the 10th year of the expansion, and there are some soft points,” said Ellen Hughes-Cromwick, a former chief economist at Ford Motor Co. and the Commerce Department who is now on the faculty at the University of Michigan. “The auto sales cycle has peaked, and the housing cycle also has peaked.” If interest rates continue to rise, she said, “I don’t really see how the economy can keep powering ahead.”
The vast majority of prominent economic forecasters, including various arms of the federal government and all of the major Wall Street banks, still regard continued growth as the most likely outcome for the U.S. economy in 2019. But there is a broad consensus that the pace of growth will slow as the sugar high provided by the Trump administration’s $1.5 trillion tax cut and spending increases begins to wear off. And some forecasters see a small, but growing, chance of a recession.
President Donald Trump’s chief economic adviser, Larry Kudlow, tried to play down such concerns Tuesday, insisting that the overall health of the economy remained robust. “There’s a certain amount of pessimism I’m reading about, maybe it has to do with a mild stock market correction,” Kudlow said, before describing such pessimism as misplaced. He rattled off recent economic data — including the most recent jobs report, which he described as “very spiffy” — to highlight the strength of the U.S. economy, before his conclusion: “We’re in very good shape.”
Jerome H. Powell, the Federal Reserve’s chairman, has also taken an optimistic line, declaring in Texas recently that he was “very happy about the state of the economy.”
The basic cause for concern is a widening gap between the evident strength of the economy this year and weakness in economic indicators that look ahead to coming years. That gap was highlighted Tuesday in the latest data on consumer confidence, which showed Americans remained pleased with their present circumstances, but were less confident that growth would continue.
Investors are showing signs of concern about the ability of the corporate sector to maintain sky-high levels of profitability. Major stock indexes are roughly flat for the year. Some businesses are starting to worry, too. Farmers are facing large losses because they cannot sell crops to China during a trade war between Washington and Beijing. Sales of new and existing homes have declined in recent months as interest rates rise. Auto sales, also vulnerable to higher rates, have been falling since 2016.
“This is a geriatric expansion,” said David Kelly, chief global strategist at JPMorgan Funds.
Kelly noted that if economic growth continued through next summer, this would become the longest-running expansion of the U.S. economy since at least the Civil War.
It is proverbial among economists that expansions do not die of old age. But the end of Trump’s fiscal stimulus will most likely drop economic growth back toward an annual rate around 2 percent, leaving little margin for error. “It wouldn’t take much to go wrong to put us into a recession,” Kelly said.
Many analysts regard Trump and Powell as the greatest threats to the economic expansion.
Trump’s trade war with China has yet to make a discernible dent in domestic growth, but if the conflict continues, or escalates, the impact on the economy could increase.
Another concern is that the Fed’s current path of interest rate increases will choke growth.
Both forces already are battering the automobile industry. Trump’s tariffs on aluminum and steel have raised costs for carmakers, the nation’s largest consumer of those materials. The Fed’s rate increases, meanwhile, have raised the cost of car loans, discouraging potential buyers.
Trump told The Washington Post on Tuesday that the Fed was undermining economic growth and blamed it for the woes of General Motors. “I’m doing deals, and I’m not being accommodated by the Fed,” he said. “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.” The Fed is widely expected to raise its benchmark interest rate for a fourth time this year at its next meeting, in mid-December. But Fed officials, well aware of the danger, have emphasized in recent weeks that their plans for next year will depend on the evolution of the economic data.
Richard Clarida, the Fed’s vice chairman, said Tuesday the economy remained “robust,” and the Fed planned to keep raising rates. Deciding how high to go, he said, would require “judgment and humility.”
Powell said this month that the Fed would proceed like a man in a dark room. “What do you do?” he said. “You slow down. You stop, probably, and feel your way. It’s not different with policy.”
GM’s cuts reflect the particular challenges facing the auto industry, including the nascent shift toward electric and self-driving vehicles. Mary T. Barra, the company’s chief executive, said GM was eliminating some mechanical engineers to make room for more software engineers. And she said the company was not acting in anticipation of a recession. “We are taking these actions now while the company and the economy are strong to stay in front of a fast-changing market,” she said.
But the company’s retrenchment underscored the broader fragility of the economic expansion. GM must fund its investment plans by cutting back in other parts of its business because its costs are rising while its sales are declining in both of its major markets: the United States and China.
The Trump administration said its economic policies would deliver a lasting boost to growth, and Trump specifically highlighted the auto industry, and GM, as beneficiaries of those policies. So far, however, those policies have delivered a short-term increase in spending. The tax cuts passed in 2017 were designed to encourage investment: New factories, new equipment, new products. Tariffs on foreign steel and aluminum, and on Chinese goods, were supposed to serve the same purpose. But GM has said the cost of the tariffs exceeds the benefits from the tax cuts — and instead of building new factories, GM is moving to shutter domestic plants.
Kudlow defended the administration’s policies Tuesday and said that revisions to the North American Free Trade Agreement would help the auto industry. “There’s a lot of disappointment, even anger,” about the company’s decision, he said. The administration also said it was considering ways of punishing GM by ending other federal subsidies, which seemed unlikely to help the economy.
Some analysts say the focus on what might go wrong is obscuring the reality that the economy remains strong. The primary engine of growth is consumer spending, which accounts for about two-thirds of economic activity. The pace of wage gains has increased, consumer confidence remains close to the post-recession high set earlier this year, and retailers are anticipating a strong holiday season.
“Consumers haven’t run out of money and confidence yet, which means economic growth remains on track,” said Chris Rupkey, chief financial economist at MUFG. Rupkey noted that 46.6 percent of consumers said in the November survey of consumer confidence that good jobs were plentiful, the best figure during the current recovery. “Why is confidence so high?” he asked. “It’s jobs, jobs, jobs.”