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Business

Trump's recession is rising – POLITICO





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                  A board over the New York Stock Exchange on Tuesday. The warning came from the bond market where investors began demanding more interest on two-year Treasury debt than 10-year debt , an "inversion" of a measure known as the yield curve. | Richard Drew / AP Photo </p><div class=

Economy

A closely monitored bond market indicator suggests that the economy is heading into a recession soon.

NEW YORK – Wall Street raised another hurricane warning against the economy Wednesday as fears continue to mount that a recession may come next year, potentially crashing into President Donald Trump's attempt on winning another term.

This time the warning came from the bond market where investors started demanding more interest on two-year government debt than 10-year debt, an "inversion" of a target known as the yield curve that recently happened in 2007 before the financial crisis.

The story continued below

It sounds like a crazy little financial arcana. But it is a closely monitored meter. And investors have been wondering.

An inversion in this corner of the bond market has occurred before every recession since the 1950s, increasing the potential for the 2020 election to look more like 2008 when a crater economy dominated the political debate. This could derail Trump's plans to make 2020 more like 1984 when Ronald Reagan ran a "Morning in America" ​​campaign based on faster growth.

"You have a little panic going on here about the economy and the bond market reflecting that," said Richard Bernstein, founder of investment firm RBAdvisors. "The bond market tells you that growth is slowing down and that the economy can be much sicker than people think."

Stocks resumed their downward trend following the inversion of the bond market, with investors wiping out gains that came when Trump announced a reprieve from many of the tariffs he planned to slap on consumer goods imported from China, including mobile phones and laptops on September 1.

Trump on Tuesday delayed most of the tariffs until December 15, saying he did not want to risk higher prices during the Christmas shopping season. This seemed to undermine his argument that the Chinese pay for all the tariffs instead of American companies and consumers.

In addition to the inversion of the bond market, investors reacted Wednesday to lower growth in China and Germany. They also noted anonymous administration officials quoted in media outlets suggesting the break in the trade war – which followed a phone call between US and Chinese officials – did not signal any warming between the two sides. Dow sank more than 700 points, over 2 percent, in midday trading. The blue chip index is still at a lower point than it was 18 months ago, when the China-China trade started in earnest.

The Wall Street recession warnings, which began to intensify over the weekend, cite several factors that draw on an economy that had already lost momentum this year as the impact of Trump's 2017 tax cuts began to fade. Growth slowed to 2.1 percent in the second quarter, and most forecasts are now to soften the rest of the year. The federal budget deficit is expected to increase over a billion dollars this year, limiting Washington's ability to pump more stimulus to the economy through higher federal spending.

But the biggest estimate cited by economists is trade uncertainty, which is reflected in lower corporate spending. The loss of the Chinese market is also affecting farmers.

The U.S. central bank, under relentless attack by Trump, reversed the rate last month and cut interest rates after a series of hikes that would come policy closer to normal after a decade of near-zero interest rates in the wake of the financial crisis. The Fed is expected to cut interest rates at least once again this year, and will be under additional pressure following the recent inversion in the yield curve and the stock market.

Economists also suggest that fears of the recession, which is now going through the bond market, could even make downturns more likely. Consumer spending, job growth and wages remain healthy, but once fear is seized, it can be a powerful driver for depressing economic activity, enabling both businesses and individuals to hold large investments.

"On the subordinate's economic dashboard, we probably have a flashing warning light," economists at ING wrote in a note Wednesday. "Overnight we have seen the inversion of the 2-10 year portion of the Treasury yield curve, the first time this has happened since 2007 when the global financial crisis began to bite."

Trump administration officials strongly reject the notion that the United States is heading for a recession. They say that continued strong job and wage growth will overcome any decline caused by trade uncertainty. And they continue to maintain that Trump is working hard to overcome China's long-standing cheating on trade.

"There is no recession," a senior White House official said Wednesday. “The consumer is far too strong in terms of jobs and wages. I just don't buy it. ”

Some economists also claim that the reverse yield curve may not mean that the recession will come this time. "This time is different," advocates argue that lower long-term bond yields in the United States – which usually signal that investors think domestic economic conditions will be worse – are actually part of a global phenomenon. They note that returns are down in the world as central banks move to cut interest rates to try to stimulate growth. This may not indicate that the US economy is about to stop. And they warn against economic downfall becoming a self-fulfilling prophecy.

"The problem with using the inversion and historical record is that the yield curve is currently not a referendum on the path to economic growth in the United States, but rather a function of moving forward globally," economists at RBC Capital Markets wrote in a note to customers. "We are not in recession because of this dynamic."

But a broader view is that the reverse yield curve, although it may not be a signal of impending recession, is certainly not a positive signal.

"Of course it does matter," Bernstein said. "Whether the recession starts in two weeks, six weeks or two years – or whether we're already in one – it's hard to see how to get more bullish with a reverse yield curve . "



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