Editor’s Note: Mark Zandi is chief economist of Moody’s Analytics. He was an advisor to John McCain’s 2008 presidential campaign and supported Hillary Clinton in the 2016 presidential election. The opinions expressed in this commentary are his own.
The economy is throttling back. Way back. That’s the message in the near stall out of job growth last month. Job creation probably isn’t as bad as February’s disappointing numbers suggest — unusually poor weather played a role in limiting job growth to just 20,000 — but it is weaker than just a few months ago. Businesses are nervous, and sentiment is at risk of breaking if anything goes wrong.
And plenty could go wrong. A recession could materialize swiftly if businesses lose faith, and there is a good chance they will. While businesses aren’t running for the bunkers just yet, there’s a trade war threatening to escalate, and government budget and debt battles are looming. There is a growing sense that our economy is faltering while its fate is in the hands of a dysfunctional president and Congress.
It is increasingly difficult to keep faith that the long-running economic expansion has much longer to run. Businesses are struggling to find qualified workers to fill the record number of job openings. Sales aren’t as strong as they were, but business executives are loath to stop hiring. They fear that if sales revive, they’ll be caught short without the workers they need.
It may be surprising that the economy is having trouble of any kind. After all, President Trump and the Republican Congress passed massive tax cuts and big increases in government spending about a year ago.
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The tax cuts juiced growth, but only temporarily. The sugar rush from the tax windfall peaked last spring, when annualized real GDP spurted higher. Growth has since faded, and the economy has come to a near standstill. Retailing has faltered, housing has flatlined and the trade deficit has ballooned.
The economic benefit of the tax cuts is spent. President Trump’s claim that the cuts would spark a game-changing and sustained acceleration in growth appears specious. For stronger long-term growth, the lower taxes needed to boost business investment. But investment since the tax cuts isn’t much different than it was before.
The president also argued that the cuts would pay for themselves. Not happening. The Treasury has borrowed hundreds of billions of dollars more from global investors to pay for the big checks it cut primarily to wealthy households and big corporations.
Tax revenues are falling and the nation’s finances are a mess. The federal budget deficit is on track to breach $1 trillion this year, according to Moody’s Analytics projections. A US deficit of that scale has happened only a few times, including in World War II and at the height of the financial crisis.
No wonder the collective psyche of business managers is fragile. Nearly half of chief financial officers at major companies interviewed recently by Duke University think a recession is likely this year. Small business optimism has fallen sharply since peaking last summer. The last time Moody’s Analytics’ weekly online survey of businesses was as weak as it is today was when the economy was just coming out of the Great Recession about a decade ago.
As long as businesses hold firm and don’t cut back further on hiring, the economic expansion should continue. The economy should even make something of a comeback by mid-year.
However, this assumes nothing else goes wrong — like another government shutdown. But President Trump’s newly proposed budget for 2020 includes billions of dollars for the Mexican border wall. Given that there is little chance the Democratic House will go along, odds of another shutdown just jumped.
Then there is possible brinkmanship over increasing the legal limit on the government’s ability to borrow money to pay for its widening budget deficit. This debt limit, which had been suspended in last year’s budget battles, was reinstated this month. If the Treasury can no longer borrow, it will run out of cash to pay all its bills later this summer. Someone won’t get paid on time. That’s a prescription for an implosion in financial markets and the economy.
Most worrisome, because it is already a reality, is President Trump’s trade war. This escalated significantly last year and is doing serious economic damage. The first tariff increases were on washing machines and solar panels, then steel and aluminum, and then hundreds of billions of Chinese imports. The administration continues to threaten even higher tariffs on more Chinese imports, and vehicle imports from our key trade partners, including Japan, Korea and Germany.
Trump’s protectionist trade policies have brought much of the rest of the world to the precipice of recession. To be sure, other factors are contributing to the global economy’s problems — such as Brexit and the Chinese crackdown on lending by their financial institutions. But the trade war is the principal culprit. CEOs of major multinational businesses won’t make a big investment decision until they get clarity on what the president plans to do next. President Trump needs to find a face-saving way out of his trade war, and soon. Otherwise, he risks losing what remains of businesses’ faith in the economy and pushing us all more swiftly down the road to recession.