Is The U.S. Headed For Recession? | KUER 90.1

Is The U.S. Headed For Recession?

Jun 29, 2018
Originally published on June 29, 2018 8:40 pm

The economic tea leaves right now are getting hard to read. The latest measure of economic growth showed the economy expanded at a lackluster 2 percent rate in the first quarter.

Estimates for second-quarter growth are much higher, and that has the Trump administration claiming its policies are working. Still, despite that rosy forecast, more analysts are pointing to worrying signs that with the expansion at nearly nine years and counting, a recession could be looming.

President Trump has long predicted that his policies will spur growth so much that the economy will expand at a rate well above 3 percent — maybe even 5 percent. Many economists have scoffed at rates that high.

"A year ago, people were laughing when we talked about 3 percent GDP," Treasury Secretary Steven Mnuchin told CNBC this week. But he noted that some analysts forecast that the next reading of the nation's gross domestic product will show growth above 4 percent.

"We're expecting a big second-quarter GDP number," Mnuchin said. "We have an economy that's here because of the president's tax plan and the president's regulatory relief." Meanwhile, the unemployment rate is at an 18-year low.

But GDP numbers bounce around quarter to quarter. And more analysts see warning signs of a recession on the horizon.

One of those signs is a recent shift in the bond market. Ten-year Treasury bonds usually pay a noticeably higher interest rate than shorter-term two-year notes. That's because investors in long-term bonds are taking on a greater inflation risk. But lately, the gap between the two — known as the yield curve — has been shrinking.

"The yield curve may sound boring, and it does, but some believe that a flat or inverted yield curve is a recessionary canary in a coal mine," says Scott Simon, a former portfolio manager who oversaw nearly $1 trillion in mortgage securities at the bond trading firm PIMCO.

"If people think the economy is going to slow and inflation is going to go down, long-term interest rates tend to go down," he says.

When that happens, when plotted on a graph, the difference between the long and short bonds flattens out. It can even flip or invert — with short-term rates exceeding long-term yields.

That can be a sign that a lot of investors see trouble ahead, which is why it sets off a blinking red light on economists' dashboards. In fact, every recession in the past 60 years has happened after the yield curve's red light started blinking. And it's getting pretty close to that level again.

That may sound ominous. But Simon says the yield curve "hasn't been a very good predictor because it keeps predicting recessions that haven't occurred. It was wrong in 1994, it was wrong in 1998, it was right in 2001 [and] it was also right in 2006-07."

But he says he is not worried about it this time around. That's because ever since the Great Recession, the Federal Reserve and other central banks around the world have been doing unusual things that distort the bond market. And he says that has thrown off this recession meter.

But just about all economists agree there is one thing that could eventually drive the economy into recession: a trade war.

David Kotok, chief economist with Cumberland Advisors, says Trump is playing a dangerous game. "Who wants to play a game where everybody loses?" Kotok says.

Already, Kotok says, he has lowered growth forecasts for the second half of the year. Beyond the angry trade rhetoric, he says, the White House lacks a coherent approach to trade policy.

"You don't invite compromise when you scream at the other guy," Kotok says. And beyond that, he asks: "What's the policy of the United States? Is it [Peter] Navarro? Is it Mnuchin? Is it Wilbur Ross? Is it Larry Kudlow? Is it the president, who changes his mind back and forth every day? How do you proceed?"

Kotok says businesses are delaying investments already amid the uncertainty, and that slows growth. He is not predicting recession yet. But if the trade fight grows into a full-blown trade war, he says that definitely could drive the country into recession.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

MARY LOUISE KELLY, HOST:

The government's latest report on GDP, the gross domestic product, shows the economy expanding at a lackluster 2 percent in the first quarter, but estimates for the second quarter are much higher. And that has the Trump administration claiming its policies are working. Still, a growing number of analysts point to signs a recession could be looming. NPR's Chris Arnold tells us what's happening.

CHRIS ARNOLD, BYLINE: The president has predicted that his policies will spur growth so much that the U.S. economy will grow at a rate well above 3 percent, maybe even 5 percent. That would be super great economic growth - more jobs, probably better wages.

(SOUNDBITE OF ARCHIVED RECORDING)

STEVEN MNUCHIN: A year ago, people were laughing when we talked about 3 percent GDP.

ARNOLD: That's Treasury Secretary Steven Mnuchin speaking on CNBC. He was happy to talk about how some analysts now think that the next reading of gross domestic product will show growth somewhere between 4 and 5 percent.

(SOUNDBITE OF ARCHIVED RECORDING)

MNUCHIN: We're expecting a big second-quarter GDP number. We have an economy that's here because of the president's tax plan and the president's regulatory relief.

ARNOLD: At the same time, unemployment is at historic lows. But it may not be all sunshine and good times are here again. Those GDP numbers bounce around a lot quarter to quarter, and a growing number of analysts see warning signs of a recession. One of those signs is called...

SCOTT SIMON: The yield curve.

ARNOLD: ...The yield curve. That's Scott Simon. He's a former portfolio manager at the bond trading firm PIMCO. So we asked him, why is this yield curve thing worrying people?

SIMON: The yield curve may sound boring - and it does - but some believe that a flatter, inverted yield curve is a recessionary canary in a coal mine.

ARNOLD: OK, a flat or inverted yield curve - here's what that actually means. Ten-year Treasury bonds, they usually pay out a higher interest rate than shorter-term bonds. That's because of expectations about economic growth and inflation.

SIMON: If people think the economy is going to slow and inflation's going to go down, long-term interest rates tend to go down.

ARNOLD: And when plotted on a graph, the difference between the long and the short bonds flattens out. It can even flip. That can be a sign that a lot of investors see trouble ahead, which is why it sets off a blinking red light on economists' dashboards. In fact, every recession of the past 60 years has happened after the yield curve's red light has started blinking. And it's getting pretty close to that level again now. So that sounds pretty ominous, but...

SIMON: While that is true, it hasn't been a very good predictor because it keeps predicting recessions that haven't occurred. It was wrong in 1994. It was wrong in 1998. It was right in 2001. It was also right in 2006-7.

ARNOLD: But Simon says he's not freaked out about it this time around. That's because ever since the Great Recession, the Fed and other central banks have been doing unusual things that distort the bond market. And so this recession meter, he says, has been thrown off. Just about all economists agree, though, there is one thing that could eventually drive the economy into recession, and that is a trade war. David Kotok is chief economist with Cumberland Advisors. He says the White House lacks a coherent approach to trade policy.

DAVID KOTOK: What's the policy of the United States? Is it Navarro? Is it Mnuchin? Is it Wilbur Ross? Is it Larry Kudlow? Is it the president who changes his mind back and forth every day? How do you proceed?

ARNOLD: Kotok says businesses are delaying investments already amidst that uncertainty. That slows growth. He's not predicting recession yet, but he says if the trade fight grows into a full-blown trade war, that could definitely drive the country into recession. Chris Arnold, NPR News.

(SOUNDBITE OF FAKEAR'S "CONSCIOUSNESS") Transcript provided by NPR, Copyright NPR.