ARE WE HEADING TOWARDS A RECESSION?
Updated: Oct 9, 2019
Recently I had the pleasure of attending Moody’s Analytics Economic Outlook Conference 2019 in Wilmington, Delaware. I decided to summarize my takeaways from the conference for those who didn’t have the opportunity to attend that amazing event.
The conference started with the keynote speech “Past Its Prime Time” of Mark Zandi, Chief Economist of Moody’s Analytics. Despite a wobbly start to 2019, Zandi expects that the US economy should hold firm assuming geopolitical threats, including the Trump trade war, Brexit, play out reasonably graciously. However, beyond 2019, Zandi warns us that things will be challenging.
The key points underlined throughout the conference are the following:
· Unemployment is declining; labour markets are tightening. As a result wage growth is on the rise. This will naturally increase the employment cost index. We need to pay attention to real wage growth and productivity. The moment real wage growth becomes higher than the productivity rate, we will start seeing pressure on business profit margins, which will lead to inflation and also slowdown of the economy.
· Trade Wars: US effective tariff rates have increased from 1.5% to 6% since November 2017, and there are ongoing uncertainty and threats to free trade. The cost of tariff increases in the US economy last year was about 1% of its GDP, which was about $200 Billion. Trade war hurt and will continue to hurt Northwest and South the Most.
· Demographic Changes & Immigration Policies: The US population is getting older, and baby boomers are retiring. Unless we find a way to increase the US labour population, the economy will get overheated. One of the quick solutions to satisfy labour need, control the wage increases & employment cost is to allow skilled labour immigrate to the USA. However, tight immigration policies followed by the Trump administration, also creating pressure on the labour market.
While Zandi sees all these issues as the indicators for recession and warns us about them, he also attracts our attention to the increase in uncertainty and anxiety in the markets.
My personal experience as a trade & investment consultant over the last couple of years also showed that the not-so-welcoming attitude of the US government toward trade partners had pushed many of those businesses to other markets such as Latin America, Canada, China and Europe, possibly resulting in lower foreign investment.
Furthermore, it is a known fact that the US has had the luxury of maintaining one of the largest current account deficit in the World ($488.5 billion) with the help of being the main investment destination for foreign investors for so many years. That said, anti-immigration policies, trade wars, tariff hikes enforced lately and the aging population have put the question in one's mind if we can continue to enjoy this luxury in the coming years as well.