Insight: There Are Clouds On The Horizon - But Is It Going To Rain?


US President Donald Trump. (AP)


Donald Trump is many things. Modest and unassuming are not two of them.

When the American President boasts about how stupendously, unprecedentedly wonderful and successful his administration has been, the first thing he lists among his achievements has been the performance of the American economy during his tenure in the White House.

The US economy, still the biggest in the world but looking over its shoulder at the onrushing train that is China, has indeed done well so far during the Trump era. We have all heard that unemployment is down in the US, that inflation continues to confound economists by remaining low and the stock market continues to advance.

But considering how often Trump brags about “his” economy, it’s worth taking a closer look at America’s performance so far under his leadership, and what, if any, warning signs await us down the road.

The Dow Jones Industrial Average has surged since Trump’s inaugural three years ago from 20,000 to nearly 30,000, and the arrow still seems to be pointing upwards.

The DJIA is a weighted average of the valuation of 30 big US corporations, whose federal tax rates were slashed by the Republican US Congress three years ago. It’s not a huge surprise that this index has risen.

It’s not ideal, of course, that more of these massive corporate gains have not been passed on either to consumers nor to workers.

Stockholders and executives, on the other hand, have profited very nicely. And the Standard and Poors and NASDAQ indices have soared to record or near-record heights, too.

Lest anyone be tempted to grab a pitchfork and head to the barricades, it is worth recalling that an estimated 50 percent of Americans participate in the US stock market in some fashion or another. It is not just fat cats with their huge estates – like the president, come to think of it – who are profiting. There are a lot of Americans whose IRAs and portfolios and other investment and pension plans are moving briskly ahead.

At the same time, all those American consumers are continuing to do what they do best. They are consuming. That is what is driving the US economy forward, despite some dark warning clouds on this presently sunny horizon.

Let’s focus on two of the more ominous of those clouds.

Cloud One. The Congressional Budget Office has just released a projection that the US federal budget deficit will reach $1.02 trillion – yes, that’s trillion – this year. That is a flood of red ink that has not been equaled since the Obama administration’s last big attempt to pull the US economy out of the Great Recession nearly a decade ago.

As most Republican politicians and affiliated conservative economists have been telling American voters since at least the end of the Second World War, US federal deficits should and usually do diminish in good economic times. The Republicans have also steadfastly stood for balanced budgets, less government spending and lowering taxes.

Under Trump, as he constantly reminds us, some taxes have been cut. But he is using his control of the federal budget to drive government spending to bloated levels, especially on defence. Hence the trillion-dollar deficit this year. And as we see, the budget is light years from being balanced.

Some readers may recall the American budget was last actually balanced some 20 years ago under Bill Clinton when the dot.com boom impelled the US economy to great heights.

But the 2017 Republican tax cuts have, by definition, starved the US government of considerable tax revenue. Trump and his Congressional followers - and Democrats - have passed a federal budget for this year that will total $4.6 trillion. That government spending will naturally juice up overall employment and jobs figures should remain healthy.

All of which is good for Trump’s re-election prospects.

But what about for the country? The Congressional Budget Office, whose statutory impartiality is mandated by law, and whose analysis is a kind of gold standard in Washington, forecasts the US economy will grow this year by 2.2 percent, not bad but less than the 3 percent figure predicted by Trump. This figure is also less than GOP legislators anticipated when boasting about their big tax cut in 2017.

If the US government doesn’t redress the massive imbalance between revenues (taxes) and expenses, the CBO says the federal budget debt will rise from $18 trillion this year to $30 trillion by the end of the decade. Imagine the interest the US will have to pay on that kind of debt.

Not so long ago, Republicans would be wailing and crying that such policies would drive the country’s economy into the ditch. But not under this president, whose control of his party is awesomely complete.

All this profligacy makes you wonder if the world’s trade is going to be denominated in Chinese yuan, cryptocurrency or who knows what else by 2030. And if that happens, the world might look at staggering American budget deficits in a much different light.

But Trump would have finished his second term by then.

Here’s what the chief economist at big consultants KPMG told reporters recently: “You can see that the sugar high in 2018 in consumption and business investment has gone away in 2019. We don’t see a corporate investment rebound in 2020. It’s going to be very sluggish year.”

American business investment shrank for the last three quarters of last year.

And then there is Cloud Two. Fasten your seatbelts.

This cloud is called the yield curve inversion. Information about this comes from America’s central bank, the Federal Reserve Bank. That’s the organization whose chairman, Jerome Powell, gave a pretty rosy economic forecast to a Congressional committee recently. Powell is frequently a target of Trump for not using monetary policy levers to further stimulate the American economy and thereby enhance the president’s re-election prospects.

A yield curve inversion occurs when the return on long-term bonds is less than the yield on short-term bonds. Right now, the return on 10-year US treasury bonds is less than what is available for three-month notes.

If you think about it, a yield curve inversion also indicates that institutions and investors are more pessimistic about the future than they are about the near term. At some point, that pessimism will lead to selling off of stocks and bonds, which will depress their price. A slide toward recession might follow.

We now have a yield curve inversion, which has preceded every major US recession. But that’s not necessarily a reason to panic, at least not for now. Because a yield curve inversion has also occurred at times when no major recession has followed. An example of no recession following a yield curve inversion occurred as recently as six months ago.

Overall, conditions indicate investment caution is advisable, but not panic selling.

Some Wall Street analysts, influenced by economic data coming from the American central bank, are estimating there is a 37 percent chance of a recession in the US during the next six months.

Trump’s trade war with China, which may or may not be abating, and the coronavirus outbreak, which may or may not be abating, are roiling markets and causing rises and drops in market indices right now.

It’s unfortunately still hard to overstate the potential implications of a downturn in the American economy for prospects in The Bahamas. With luck and perhaps some serendipity, the US will continue surging along economically and the American consumer will continue to feel confident about traveling to and maybe even investing in paradise here in The Bahamas.

No trustworthy economic forecast is without its potential dark clouds. Just because there may be clouds doesn’t mean there will be rain or worse. But we would all be well advised to pay attention to those clouds just the same.


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