Economic expansions don’t die of old age

With the economy now in an unprecedented 11th year of expansion, many economists are wondering how much longer this growth can continue and whether we are now on the cusp of a recession. In fact, a number of pundits—comedian Bill Maher among them—appear to be actively rooting for recession.

But economic prognostication is always tricky. Currently, many key economic indicators remain positive. At the same time, international trade uncertainty and slowing growth outside the country present cause for concern.

On the good news ledger, Item one is the fact that the economy and increased jobs for 106 straight months. Black and Hispanic unemployment rates are near historic lows.

Wages at every wage level are growing faster than inflation, yielding a real increase in the standard of living for workers. And those at the bottom of the income scale are enjoying the biggest percentage increases. In addition, the average family is enjoying more than $2,900 in tax savings thanks to the 2017 tax cuts.

The last half of 2018 saw all-time records — the first since 2007 — in real manufacturing output.

Yet clouds are on the economic horizon.

The latest data from the manufacturing index published by IHS Markit “signaled the fastest reduction in export sales since August 2009.” Jobs growth the past six months slowed to an average of 141,000 compared to 234,000 the prior six months. GDP growth slowed to 2.1 percent last quarter, compared to 2.6 percent since the passage of the tax cuts package.

Private nonresidential fixed investment declined last quarter for the first time since early 2016. Overall gross private domestic investment fell at a 5.5 percent annual rate last quarter, the steepest decline since the end of 2016 — although levels remain near all-time highs, more than 23 percent above the inflation-adjusted prior peak in 2006.

This month, another warning light flashed when yield on the 2-year Treasury bond briefly exceeded that on the 10-year bond. This “yield curve inversion” often — but not always — heralds a recession because it may reflect the increased demand for the safety of government bonds during times of heightened economic uncertainty. This financial phenomenon may be a less valuable predictor than in years past because the actions of the U.S. Treasury (selling large quantities of short-term debt) and Federal Reserve (purchasing large quantities of long-term debt) are contributing to the most recent inversion. Regardless, investors certainly took note.

Perhaps most problematic in the immediate term are ongoing trade disputes. The Congressional Budget Office (CBO) estimates that the tariffs imposed on Chinese imports since January 2018 will reduce average household income by $580 by 2020. This cost will rise if the threatened additional tariffs go into effect.

Families purchasing clothing, furniture, electronics and other basic items are experiencing financial stress from this form of taxation. Some companies are unable to pass these costs along to consumers, impeding their very ability to stay open for business.

Retaliatory tariffs from China are hitting U.S. exporters, including soybean farmers across the heartland. Soybean exports to China plummeted 63 percent following imposition of Chinese tariffs in July 2018. Increased exports to other nations did not fully replace the Chinese demand.

The uncertainties stemming from trade disputes with China and other trading partners discourage the business investment needed to boost economic output, increase productivity and provide abundant job opportunities.

Long-term, a far more serious threat comes in the form of proposed massive increases in government’s share of, and control of, the U.S. economy. Programs such as the Green New Deal, Medicare for All and Universal Basic Income would cost between $45 trillion and $92 trillion over 10 years.

Implementing these proposals would necessitate confiscatory tax rates — and not just on upper income earners. Middle class taxes would have to rise at least threefold, perhaps as much as tenfold. The dramatic transformation of the United States economy envisioned in the Green New Deal alone would benefit a handful of entrenched special interests while driving the standard of living for ordinary Americans down. 

What should be done to secure prosperity going forward?

Economic expansions don’t just experience a natural death. As former Federal Reserve Chair Ben Bernanke once quipped, “I like to say they get murdered.” The culprits typically involve government policies: warfare, trade protectionism, erosion of the rule of law, monetary policy mischief or invasive regulations.

The slowdown this year in manufacturing, GDP growth and business investment are warning lights but not a definitive signal that we are entering a recession. Despite headwinds, the economy continues to grow. Resolving the trade disputes will restore investor confidence and attract the investment needed to secure long-term growth. 

Joel Griffith is a research fellow in The Heritage Foundation’s Roe Institute for Economic Policy Studies.