The longest economic recovery in U.S. history, now spanning more than 10 years, hasn’t been without bumps in the road. Recession indicators spiked in both 2012 and 2015 before growth rebounded.
This year, the expansion may not bounce back. At least, not soon enough to avoid a downturn that would roil a presidential campaign in which the incumbent Republican has tied his reelection pitch to U.S. economic strength; strength that he promised to buoy by loosening business regulation and cutting corporate taxes.
“We are worried that the economy will not be as lucky this time for a few reasons,” economists at Bank of America wrote in a report analyzing recession risks that cited geopolitical trends as well as hard data and suggested a 1-in-3 chance of a downturn within the next year.
First, the recovery is older than it was before and the economy has returned to full capacity, meaning growth is tougher to achieve. The Federal Reserve’s toolkit for fighting a downturn, meanwhile, is limited, with interest rates already low and a balance sheet still carrying the bulk of trillions of dollars in securities purchases made to goose the economy after the 2008 financial crisis.
Finally, “there is a persistent shock hitting the global economy — the trade war — creating high uncertainty,” said Bank of America economist Michelle Meyer. “The trade war continues to escalate and it is not obvious that the Fed has enough ammo to counter the drag.”
That assessment mirrors months of warnings from business leaders and even some GOP lawmakers that President Trump’s aggressive use of tariffs against trading partners and a pitched fight with China, the world’s second-largest economy, risked undermining U.S. growth.
Auto sales have dipped 2.4%, a larger drop than in five of the seven recessions over the past 50 years; growth in the hours worked by U.S. employees has slowed to 0.4%, even less than in two of the downturns; and industrial production shrank 0.8%, a worse performance than in six of the slumps, according to the lender’s analysis.
One bright spot, however, is initial jobless claims, which are declining, compared with gains in all previous recessions. Unemployment in the U.S. is holding steady at 3.7%, the lowest since 1969, and payrolls expanded by 164,000 in July, well above the level needed to keep pace with population growth.
Whether those trends will survive the next round of Trump’s tariffs on Chinese goods remains to be seen. Retailers and manufacturers alike have warned that the duties of 10% on $300 billion of imports slated for Sept. 1 will force them to raise prices or cut jobs, though the president has largely shrugged off such worries so far.
While U.S. trade battles under Trump have focused heavily on China, with 25% levies on $250 billion in merchandise already in effect, the administration has also imposed duties on washing machines, solar panels, steel and aluminum, and threatened them on Vietnamese and Indian imports as well as automobiles and French wines.
Trump says the dispute with China will eventually produce a beneficial trade agreement, opening the country’s markets further to U.S. businesses and curbing Beijing’s appropriation of American firms’ intellectual property as a condition of doing business there.
“We have all the cards,” Trump told reporters on Friday, hinting that talks with Chinese negotiators next month might be canceled. “China wants to settle this deal. They’ve had the worst year that they’ve had in many, many decades, and it’s getting only worse. Thousands of companies are leaving China. They would like to make a deal. I’m not ready to make a deal.”