The United States is overdue for a recession. And the US-China trade war may prove to be the spark that causes the next downturn.
"The economy has slowed down, but the risk of hitting a wall over the next year is quite low," said Stuart Hoffman, senior financial adviser at PNC Financial.
David Kelly, chief strategist at JPMorgan Funds, is a little more cautious. He warns that there is a "real risk" of a recession by the end of next year. Kelly ties that chance to around 40%.
But it still indicates a better than 50/50 chance of sustained growth.
The economic expansion could "absolutely" continue at the current lukewarm rate of around 2%, according to Kelly.
"It can grow at that rate for many years to come, unless it is hit by some kind of shock," Kelly said.
A trade weapon will help
Economists often say that the recession is not caused by old age. They are caused by political errors, typically by the Federal Reserve.
However, the most obvious shock today would be from the US-China trade war.
The tariff battle between the world's two largest economies is to increase costs, encrypt complex supply chains and get companies to delay spending.
"Business investment is anemic at best," said Brett Ewing, chief marketing strategist at First Franklin Financial. "Further escalating the trade war is likely to damage consumer confidence. And that is the last stage of the economy."
But the good news is that the US and China have stopped lobbying on each other. The two sides have made progress in the trade negotiations and have drawn up a potential phase 1
"This will be good for business confidence and maybe activity," Fed Chief Jerome Powell said Wednesday during a press conference. "It has the potential to be an improvement in the risk picture."
Easy Money to the Rescue
Powell, however, takes no chances.
"We continue to expect the economy to expand at a moderate pace," Powell told reporters.
Although interest rate cuts do nothing to fix the underlying problem – trade uncertainty, analysts say the Fed's support can help boost confidence, boost stock prices and help interest-sensitive parts of the economy like real estate and cars.
Despite the Fed's intervention, Lindsey Piegza, chief economist at Stifel, expects the US economy to shrink within at least a quarter of next year. She said it is "splitting hair" if the economy will shrink long enough to technically qualify for a recession, which is often defined as two subsequent quarters of economic contraction.
Piegza warned the economy could get stuck in a period of very weak growth that can be difficult to escape, because interest rates are already quite low. Powell has said he is resistant to taking prices that some European countries have done.
"There is a bigger concern because the Fed does not have the ammunition to support the perpetual economy," she said.
Are consumers too divided to agree on a recession?
However, it is important to remember that while the trade war and the global downturn are melting down the US manufacturing sector, it is still a small part of the overall economy.
The factory problem has so far not led to an increase in job cuts in the rest of the economy. This has supported consumer confidence, kept household consumption, the biggest driver of growth, strong.
JPMorgan & # 39; s Kelly expects overall consumer sentiment to be solid, partly due to today's hyperpartisan environment.
"There is such a political divide in this country that not everyone will agree on the economy," he said.
Kelly pointed to studies showing Republicans were poor in the economy ahead of President Donald Trump's 2016 election. And vice versa about Democrats.
"For the most part, it's terrible that we see the world through different lenses," he said. "But that means it will be quite difficult to agree that the economy is in trouble."
Best economy ever? Not exactly
Trump has consistently spread concerns about a recession.
But sluggish growth may not be the worst at this stage of economic expansion, which is more than twice the average expansion during the 1900s.
Companies are already having trouble finding qualified workers to hire because of aging demographics and immigration barriers. Hypertrophy would exacerbate this problem and trigger an inflation spiral that forces the Fed to slam the brakes on the economy.
"This economy does not cope with 3% growth. We do not have the workforce. It will overheat," Kelly said.
Moderate growth also limits the risk of profits being generated, such as the bubbles in tech stocks and properties that destroyed the past decade.
"You can't have a bust without a boom. And there's no boom," Kelly said.