At a Glance
- Global growth may be most threatened by slowing trade between the world’s two largest trade partners
- Previous economic expansions were ended by much higher short-term rates than exist today
On June 30, 2019, the current economic expansion tied the old record from the Clinton decade of 40 quarters, and as each month passes without a recession it will be setting new records for duration.
As we have pointed out many times, economic expansions do not end because of old age. It takes a policy mistake.
Previous expansions were ended by much higher short-term rates: for example, 5.25 percent in 2007, 6.5 percent in 2000, 9.8 percent in 1989, 19 percent in 1981, and the 1960s expansion ended with federal funds at 9 percent in 1969.
Our point is that it is pretty hard to argue that 2.4 percent short-term rates will be the straw that breaks the back of this record-long economic expansion. So, what are the prime candidates for a policy mistake this time around if the Fed is not going to be the culprit? Here are three threats that could combine to be the trigger.
Tariffs are a tax. The Trump Administration has used tariffs as a weapon in its trade wars to attempt to force concessions from countries around the world – China, Mexico, Canada and now the focus turns to Europe.
The U.S. and China are the number one or number two trading partners of most other countries, and both the U.S. and China are seeing their imports decelerate or even decline in some cases.
When global trade slows, so does global growth. We doubt the trade wars and weaponization of tariffs are enough to cause a U.S. recession, but slower real GDP growth does seem to be in the cards.
Declining Business Investment
Our perspective is that the seeds of an economic deceleration from a 3 percent real GDP path back down toward 2 percent and maybe a little weaker have been sown by all the uncertainty over the trade war and weaponization of tariffs. And, lowering short-term interest rates from 2.4 percent to 1 percent or even back to 0 percent will make no difference for business investment decisions.
This is a heavy burden for the global economy, and all multi-national corporations have to manage these risks, and lower short-term interest rates are not going to help.