Warning signs point to a global decline

Economic production in Germany, the world's fourth-largest economy, contracted in the second quarter, according to a report on Wednesday, while a report on factory production in China, the world's second-largest economy, was lower than expected. Earlier this week, Argentina's currency and stock markets fell, raising fears for one of South America's largest economies.

The Dow Jones Industrial Average fell about 800 points, or about 3.1[ads1]%, in its biggest loss of the year.

Investors searched for ultrasonic holdings, as they often do in moments of uncertainty, and bought US government securities on Wednesday.

The return on the US 30-year Treasury, which is reversing the price, fell to record lows, a sign of expectations of low inflation and slow growth in addition to investor appetite for safe assets.

At the same time, Treasury yields with a 10-year maturity fell short of Treasury yields with a 2-year maturity, a phenomenon known as an inverse yield curve, which has indicated a looming recession in the past.

"It's almost like we're starting to see a textbook version of a pre-recession era,"

Nicholas Akins,

Ohio-based CEO

American Electric Power
Co.

, said in an interview Wednesday. The company supplies power to industrial, commercial and residential customers in 11 states.

"I think the US economy has enough strength to avoid (a recession),"

Janet Yellen,

said the former chairman of the Federal Reserve, in a taped interview with The Wall Street Journal to be broadcast Friday on the Fox Business Network. "But the odds have definitely risen, and they're higher than I'm honestly comfortable with."

The Fed lowered short-term interest rates in July, partly in response to slower global growth, and investors expect it to continue with interest rate cuts. Lower interest rates can help stimulate investment and spending by encouraging households and businesses to borrow more.

A major factor behind the recent problems is a decline in global trade, fueled by a US-China spat that has led to a series of duel tariffs. Customs has driven up the price of hundreds of billions of dollars in goods produced by the world's two largest economies and hit farmers, producers, retailers and others.

For export-dependent economies such as China and Germany, trade disruption poses immediate problems. The United States is less dependent on exports than others, which isolates the economy.

Continued because US multinational corporations have spent the last two decades building huge global supply networks, uncertainty in trade and the changing costs of doing business scare investment across the globe.

US corporate investment fell by a 0.6% annual interest rate in the second quarter, after reaching quarterly growth rates above 8% in late 2017 and early 2018. US exports also contracted in the second quarter.

Economists say that the trend may continue if business profits continue to fall. U.S. corporate earnings before taxes, across the economy, fell by 2.2% in the first quarter compared to the prior year, according to the Commerce Department.

Investment analysts have peeped American business executives – especially manufacturers – into investor conference calls. the last few weeks whether they see activity soften and are prepared for a downturn.

"It's no secret that given the level of uncertainty right now around [a] the number of problems globally that – from the business tentativeness point of view that we certainly see more of it right now,"

E. Scott Santi,

CEO of Illinois Toolworks Inc., a maker of Glenview, Ill., said when asked about the recession in a conversation last week.

A poll on the Wall Street Journal released last week showed economists believe the likelihood of a recession has increased. On average, they saw a 33.6% probability of a recession in the next 12 months, up from 30.1% in July and the highest level in the Journal survey went back to 2011. The average probability was 18.3% a year ago.

Many previous recessions have been caused by high interest rates set by the Federal Reserve, such as the early 1980s; bubbles that burst the technology bust in 2000 and 2001; financial instabilities as in 2007, 2008 and 2009; or a combination of them all.

Allen Sinai,

a decision maker at Decision Economics worries that businesses – not households, banks or the Fed – could lead to the next downturn. If business revenue hits, it can lead to less investment and then less hiring, and create a self-fulfilling process of contraction. Sinai has lowered its estimate of the risk of recession for the first time in many years.

"I think the trade thing is a big political mistake," he said. He agrees with President Trump that China has not followed the rules of global trade for many years and must be confronted. But he said the tariffs the United States uses to punish China damage at home. "There has to be a better way to do it."

The good news is that the United States is not confronted with serious vacations to relax, as it was in the mid-2000s with the housing boom or the late 1990s with gains in technical equity. Because of that, he and several other economists said, a downturn could now end up being mild if at all.

With low unemployment, income and household savings rates rise higher than in the late 1990s or mid-2000s, many consumers are in better shape to weather a storm than in previous years.

For now, slow economic growth is the estimate for many analysts. Macroeconomic Advisers, a forecasting company, estimates the economy to grow at an annual rate of 1.7% this quarter, well below the 3% rate that the Trump administration has said they hope to achieve in the long run.

An economy that is expanding at a sub-2% rate tends to descend into negative territory in the face of some new, unforeseen shock. But the domestic economy – largely driven by consumers, rather than exporters – may be able to bear the day.

Michael Uffner,

CEO of AutoTeam Delaware, which owns three car dealerships in the state, said sales have increased modestly this year despite higher prices for new cars. He said that his customers seem wrong, largely because interest rates remain low, making it easy for households to borrow for new cars.

"Although the average transaction price has gone up, most consumers are looking at budgets and can see that they can afford a car or truck that is a little more expensive today than a year ago," he said. [19659004] Others are more susceptible to global headwinds.

Mr. Akins, American Electric Power CEO, describes a tariff effect caused by tariffs, which has hurt U.S. manufacturers of metals, chemicals and other products. Electricity sales to industrial suppliers have steadily grown most of the year, but was flat in the fourth quarter of 2018 and the first quarter of 2019. They fell in the second quarter of this year. the higher wages that companies must pay to retain employees during a period of historically low unemployment.

Mr. Akins said he has not yet seen a significant decline in investment If the economy goes into recession, it is in a much stronger position than in 2009, he added.

"I think we certainly don't start as far in the run as we did before the last recession," he said.

Write to Josh Mitchell at joshua.mitchell@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com

Corrections & Enhancements
Nicholas Akins is CEO of American Electric Power Co. Earlier version of this article spelled incorrect surname like Atkins.