This month, the U.S. economy will have been growing for 121 months, the longest run since records began in 1854. Yet history suggests that expansions don’t last forever. What might cause a recession?
Unemployment is at a 50-year low and inflation is subdued and the household-debt-to-GDP ratio is declining. There are few signs of excesses in financial markets like the subprime mortgage lending of a decade ago, but stock markets and real estate prices are propped up by historically low interest rates and the debt of non-financial businesses is at an all-time high of 74% of GDP.
The economy is now largely dominated by the service sector but manufacturers are very dependent on complex and fragile global supply chains, leaving them vulnerable to unpredictable policy changes by governments.
And it is these “cross-currents,” or government policy mistakes, that the Federal Reserve fears may bring the party to an end.
Last week Fed Chairman Jerome Powell was more specific in testimony to Congress — the “cross currents” are largely the result of the Trump administration’s trade wars which are disrupting manufacturers’ supply lines, undermining business confidence and business investment.
“The slowdown in business fixed investment may reflect concerns about trade tensions and slower growth in the global economy,” Powell told the House Financial Services Committee on Wednesday.
“Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments,” he added. “Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”