Fears of a looming U.S. recession hit new heights on Wednesday as warning signs of a slowdown flashed around the world.
U.S stocks suffered their worst day of losses this year — sending the Dow Jones Industrial Average down 800 points — after turmoil in the U.S. bond market and dour economic data from
Germany and
China raised the odds of a worldwide contraction.
The market plunge reflects growing worries that the
economy could also be headed for a contraction next year, ending more than a decade of consistent growth since the 2008 global financial crisis.
The darkening economic clouds come at a difficult time for President Trump, posing a direct threat to his plans to ride a wave of robust U.S. job market and consumer spending to a second term.
The president was quick to blame the Federal Reserve for Wednesday’s stock plunge, heaping scorn on his frequent economic scapegoat as central banks around the world cut their rates.
“We are winning, big time, against China,” Trump tweeted shortly before the stock market closed Wednesday.
“Our problem is with the Fed,” Trump continued. “We should easily be reaping big Rewards & Gains, but the Fed is holding us back.”
Trump has frequently touted stock markets and their steady rise as an indicator of his economic performance. Despite the plunge on Wednesday, the Dow remains close to 25,500 points, well above the roughly 19,800 points it was trading at the day he took office in January 2017.
Meanwhile, the unemployment rate has remained low at 3.7 percent, while consumer spending has remained strong.
But increasingly, economists believe that the toll of Trump’s trade war and other global setbacks is now all but certain to slow — and possibly shrink — the U.S. economy before the 2020 election.
Data last month showed annualized gross domestic product growth of 2.1 percent in the second quarter, well below the 3.1 percent expansion of the previous three months and Trump's goal of 3 percent annual growth.
Bond markets are already signaling a potential U.S. recession: The stock market plunge on Wednesday was sparked in large part by an inverted bond yield curve, or when the yield for 10-year Treasury bonds falls below that for 2-year bonds. Yield curve inversions tend to precede recessions by 12 to 18 months.
“I don't think the economy is going to be behind the president's back as he makes his way to the next election,” said Mark Zandi, chief economist at Moody's Analytics. “Maybe not a recession, but it's going to feel a lot uglier a year from now.”
Trump's stewardship of the economy could prove critical in 2020, given it is an area where he generally receives solid marks according to recent polls.
He and his top economic administration officials are already pushing back against doomsday talk on the economy.
Commerce Secretary Wilbur Ross told CNBC on Wednesday that the idea that the bond yield inversion “is going to be the end of the economy strikes me as a little aggressive.”
Soon after, Trump’s top trade adviser, Peter Navarro, said in an interview with the Fox Business Network that the market “is sending yet another signal that the Fed needs to lower interest rates by 50 basis points as quickly as possible.”
Even Powell's predecessor, former Fed Chair Janet Yellen, approached the inversion with caution in an interview with Fox Business.
“I think that the U.S. economy has enough strength to avoid that,” Yellen said when asked if she thought the U.S. was headed into a recession. “But the odds have clearly risen and they are higher than I’m frankly comfortable with.”
For now, Trump will likely continue to blame the Fed and Chairman Jerome Powell, disavowing any role in hindering the economy.
The independent Fed will meet next in September and is likely to cut rates for the second consecutive meeting after reducing borrowing costs in July for the first time since 2008.
While lower rates may induce some skittish businesses to invest and expand, cheaper money won’t likely soothe uncertainty created by Trump’s trade battles.
Instead, economists believe an end to the trade tensions with China would likely be the most effective way to boost economic confidence.
Trump has imposed a 25 percent tariff on $250 billion in Chinese imports, and he was set to levy a 10 percent tax on $300 billion more in goods from China by September, though he opted to push back the latest round of
tariffs until the end of the year to protect consumers from higher holiday shopping costs.
China, in turn, has responded with tariffs on U.S. agricultural products and a freeze on government imports of
American crops and livestock.
But a solution to the trade war with China appears far off given rising tensions between Trump and Chinese President Xi Jinping. China is also dealing with the pressure of pro-democracy
protests in Hong Kong.
Zandi said that until the U.S.-China trade war is resolved, businesses will have little reason to bet on stronger economic growth.
“The uncertainty created by the war is causing businesses to sit on their hands. They don't know the answers to basic questions,” Zandi said.
'“Until they can answer those questions, they're not going to make big investment decisions or hiring decisions, expansion decisions, and the economy is struggling as a result.”