The economic expansion that arose out of the ashes of the Great Recession is old by historical standards.
Spanning more than a decade, it is the longest period of uninterrupted economic growth in American history. And the expansion is starting to show its age. The manufacturing sector is shrinking. Business spending has contracted for two consecutive quarters. And job vacancies have gone down.
The United States is late for a recession. And the trade war between the United States and China could prove to be the spark that will spark the next slowdown.
Despite this treacherous backdrop, there are reasons the record expansion could continue, perhaps for years to come. American households are still spending. The labor market is holding up better than feared. The Federal Reserve is doing everything it can to try to organize a soft landing. And the global economy is expected to rebound if trade tensions ease.
âThe economy has slowed, but the risk of hitting a wall next year is pretty low,â said Stuart Hoffman, senior economic advisor at PNC Financial.
David Kelly, chief global strategist at JPMorgan Funds, is a little more cautious. He warns that there is a “real risk” of a recession by the end of next year. Kelly rates this chance at around 40%.
But that still suggests a better than 50/50 chance of sustained growth.
Economic expansion could “absolutely” continue at the current lukewarm pace of around 2%, according to Kelly.
âHe could move forward at this rate for many years to come, unless he was struck by some kind of shock,â Kelly said.
Economists often say that recessions are not caused by old age. They are caused by political mistakes, usually on the part of the Federal Reserve.
The most obvious shock today, however, would come from the trade war between the United States and China.
The pricing battle between the world’s two largest economies is driving up costs, blurring complex supply chains and forcing companies to delay spending.
âBusiness investing is anemic at best,â said Brett Ewing, chief market strategist at First Franklin Financial. âA further escalation of the trade war would most likely hurt consumer confidence. And this is the last stage of the economy.
But the good news is that the United States and China have stopped pushing for tariffs. The two sides have made progress in trade talks, putting together a potential phase one trade deal that could be signed next month.
“This would bode well for business confidence and perhaps activity,” Fed chief Jerome Powell said at a press conference on Wednesday. “It has the potential to improve the risk image.”
Powell is not taking any chances, however.
The Fed acted quickly in an attempt to counter the pain of the trade war with easy money. The US central bank cut interest rates on Wednesday – the third straight rate cut – despite the S&P 500 trading at historic highs.
âWe continue to expect the economy to grow at a moderate pace,â Powell told reporters.
While rate cuts do nothing to solve the underlying problem – trade uncertainty – analysts believe Fed support could help boost confidence, support stock prices and help sectors of the economy sensitive to interest rates such as real estate and automobiles.
Despite the Fed’s intervention, Lindsey Piegza, chief economist at Stifel, expects the US economy to contract for at least a quarter next year. She said it is “cutting corners” if the economy contracts long enough to technically qualify for a recession, which is often defined as two consecutive quarters of economic contraction.
Piegza warned that the economy could get stuck in a period of very weak growth that might be difficult to escape, as interest rates are already quite low. Powell said he was reluctant to take negative rates as some European countries have done.
“This is of greater concern because the Fed does not have the ammunition to perpetually support the economy,” she said.
Nonetheless, it’s important to remember that while the trade war and the global downturn hit America’s manufacturing sector, it remains a small part of the overall economy.
Factory problems have yet to lead to more job cuts in the rest of the economy. In fact, the United States created more jobs in October than economists had anticipated. Despite GM’s strike and commercial nervousness, non-farm payrolls jumped 128,000 jobs.
All of this has supported consumer confidence, keeping household spending, the main driver of growth, strong.
JPMorgan’s Kelly expects overall consumer sentiment to remain strong, in part because of today’s hyper-partisan environment.
âThere is such a political divide in this country that not everyone will agree on the economy,â he said.
Kelly pointed to polls showing Republicans were negative about the economy until President Donald Trump was elected in 2016. And vice versa for Democrats.
âFor the most part it’s awful that we see the world through different lenses,â he said. “But that means it will be quite difficult to get consensus that the economy is struggling.”
Trump has always allayed concerns about a recession.
In a Tweeter Trump on Wednesday applauded what he called the “greatest economy in American history.”
Of course, this is not true. Hours after the tweet, Trump’s Commerce Department said U.S. GDP growth slowed to 1.9% in the third quarter. This is the second consecutive quarter of slower growth.
But that lukewarm growth may not be the worst thing at this stage of economic expansion, which is more than twice as long as the average expansion over the 20th century.
Businesses are already struggling to find skilled workers to hire due to aging populations and immigration limitations. Hyper-growth would exacerbate this problem, triggering an inflationary spiral that would force the Fed to severely slow the economy.
âThis economy cannot handle 3% growth. We don’t have the manpower. It’s going to overheat, âKelly said.
Moderate growth also limits the risk of excess formation, like the bubbles in tech stocks and real estate that have wreaked havoc over the past decade.
âYou can’t have a bust without a boom. And there’s no boom, âKelly said.