The US economy: recovery or recession?

2020-05-05 15:43 Minggao SHEN

AnnexThe US economy - recovery or recession.pdf

Multiple policy options to forestall recession The probability that the US will slide into recession after one year is 27.1%, based on the model developed by the New York Fed in early April, close to the level in 1990, when the economy was about to head into recession, but still lower than in 2008 before the global financial crisis. As noted in our previous reports, the US would be likely to begin a recession one year after the start of the monthly inversion of the 10-year and the one-year Treasury yields. Nevertheless, the risks could be tamed with efforts to beef up infrastructure, promote trade talks with China and cut interest rates.

The longest recovery ever The US has had long bull runs and short bear markets throughout its history. Its contractions or recessions usually end within one year, and even the longest lasted just 17 months. The current recovery began in July 2009, and the economy has been expanding for 118 months up to April 2019. This recovery is sure to continue to the third quarter and become the longest ever; how much longer it can persist hinges on how visionary US policies can be.

Shoring up infrastructure On April 30, Trump and the Democrats agreed to spend US$2trn on infrastructure including roads, bridges, highways, water networks, power grids and broadband. A recent analysis of 88 countries in the period of 1960-2000 suggests that 10% growth in infrastructure investment could lift GDP growth by 0.7-1pp.

Uncertainties to be defused by China-US trade talks A successful outcome to the China-US trade negotiations is unlikely to change the competitive landscape between the two countries, but it would lower the uncertainties of economic growth for both sides and the rest of the world. The World Economic Forum estimates that a full-blown China-US trade war could cost 0.7pp of global GDP growth in 2019, and that GDP in China/US/Europe could slow down by 0.9/0.4/0.8pp. Although the short-term US trade deficit could be narrowed by an increase in China’s imports, over the long run, a smaller trade deficit will be the result of a slower US economy.

Rate cuts an alternative The Fed rarely cuts rates. Statistics since 1955 show that the Fed only cuts rates nine months after employment hits a trough on average. But this time could be different. Low inflation and other factors could prompt the Fed to take the initiative and lower interest rates earlier to avoid an outright yield inversion and counter the risks of recession. In our view, the Fed is unlikely to reduce interest rates this year, unless the uncertainties of infrastructure expansion and China-US trade talks are still looming, or unless their effects miss expectations.

Risks Policy schedule and effects miss expectations; failure to put in place necessary funds.

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