By Pawan Naidu
Former President Bill Clinton’s famous campaign slogan “It’s the economy, stupid,” illistrated the main reason people vote about pocketbook issues. In that case, President Trump has a lot to feel good about heading into the 2020 election. For the most part, the economy is healthy and has been since the beginning of his presidency. There are conflicting opinions on how much credit the Trump administration should receive for the economy, however the sitting president usually receives the majority of the credit even if there are other factors.
The strong economy is one of the key arguments the Trump campaign is using during its reelection efforts. There have been some recent news that suggest that not only is the economy slowing down, but the U.S. might be headed for a recession. If a recession hits before the 2020 election, the president will have an uphill climb to earn a second term.
Is a Recession Around the Corner?
When news broke of the yield curve being inverted, economist raised concerns of a possible recession on the horizon. The yield curve measures bond investors feeling’s about risk. When the yield curve is inverted it means it means that the market thinks future interest rates are going to be lower than they are today. During a recession, the Federal Reserve usually tries to coax rates downward to stimulate the economy. When a recession is on, people become skittish about borrowing money and are more apt to save what they have.
These indicators reveal what a large large group of people think and that a recession is a mass psychology phenomenon. This is because the yield curve and S&P 500 stock index are determined on what investors are predicting to happen to the market. These could be nothing more than a market blip, but this does reveal investors are at least somewhat nervous about the future economy.
Laura Veldkamp, professor of finance at Columbia University’s Graduate School of Business, told the Washington Post that there are some more indicatiors that can be useful in projecting a recession.
Traditionally, exports have been a good measure of market activity. They are measured frequently and accurately. However, recent trade conflicts with China could result in exports not indicating a fading economy. If a nation’s imports exceed its exports, the nation is said to have a trade deficit. If a nation’s exports exceed its imports, it has a trade surplus.
New housing construction has also been a useful indicator in the past. However, changes in the housing market and how houses are financed don’t allow a perfect comparison to the past. Sustained declines in housing starts slow the economy and can push it into a recession. Likewise, increases in housing activity triggers economic growth.
Industrial production is another monthly measured that is accurately measured. We have to remember though that industrial measurement is becoming a smaller part of the US economy. Fluctuations within the industrial sector account for most of the variation in overall economic growth
All three of these indicators are either falling or have stayed flat, according to Veldkamp.
Veldkamp mentioned that trade conflicts might limit measuring exports as a way of predicting if a recession is likely. However, can trade conflicts contribute to causing a recession?
“While structural factors remain primary, and while the POTUS and the Supreme Leader of the CCP (Chinese Communist Party) state could resolve the problems caused by PRC (People’s Republic of China) economic cheating tomorrow, a trade war between the world’s two largest economies is a major negative for future growth,” Edward Friedman, professor of political science at the University of Madison-Wisconsin, said.
Veldkamp agreed that trade wars can lead to recessions.
“Yes, of course trade wars can trigger a recession. If other countries don’t buy our goods, people lose jobs and stop buying as much from others,” she said.
Trade wars are also “thought to be one of the causes of the great depression as well,” Veldkamp said.
In addition to the tariffs that were already implemented, the Trump administration levied 15 percent on an additional $112 billion of Chinese imports.
“About two-thirds of goods tariffed in this round are consumer goods, which could lead to a more pronounced impact on the US as compared to earlier tranches,” Morgan Stanley chief economist Chetan Ahya, said to CNBC. “Trade tensions have pushed corporate confidence and global growth to multi-year lows.”
The firm worries that a global recession will occur in about 9 months if the trade war escalates to the U.S. raising tariffs on Chinese goods to 25 percent “on all imports from China for 4-6 months,” Ahya said. “We would see the global economy entering recession in three quarters.”
A majority of surveyed economists agree that the U.S. will see a recession in 2020. According to a recent survey by the National Association of Business Economics, 34 percent of economists believe a slowing economy will tip into recession in 2021. That’s up from 25 percent in a survey taken in February. Only 2 percent of those polled expect a recession to begin this year, while 38 percent predict that it will occur in 2020.
In many ways, a recession should be expected. Economies are cyclical, and while policies do matter, the nature of economies are that they are going to rise and fall. The economy was never going to stay strong forever, and when a recession does occur, the economy will rise again.
The president has publicly dismissed concerns of a recession and blamed Democrats of using the threat as a campaign tool.
“Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world,” he tweeted on Aug 19.
“I don’t see a recession,” Trump told reporters on Aug 18, continuing to dismiss concerns of a recession. “I’m prepared for everything. I don’t think we’re having a recession. We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut, and they’re loaded up with money. They’re buying. I saw the Walmart numbers; they were through the roof, just two days ago. That’s better than any poll. That’s better than any economist.”
Surviving a Recession
Recessions might be inevitable, but your suffering during one doesn’t have to be. Everyone feels a recession and it will be difficult to completely avoid the effects of one. But there are steps you can take to make sure the damage is minimal. The Motley Fool offers four tips to making sure your recession ready.
You will need to build an emergency fund. During recessions investment portfolios plummet, jobs become less stable and raises become less common. The best case scenario is stashing away six months of living expenses or more if your income permits it. This can be helpful if you lose your job or have hours cut.
You should also diversify your portfolio. A diversified portfolio contains a wide range of investments, including individual stocks and bonds. It is important for these assets to be spread across different sectors of the market. For example, when purchasing individual stocks, you might want to choose biotech companies, energy companies and retailers so if one of these segments over performs, it can offset losses in others.
You might also want to consider getting a side job. In a recession increased job loss will occur, and unfortunately this could happen to you. A good way to protect yourself is to get a secondary source of income in case your primary source is not available anymore. For example, you might retain your steady job as an engineer, design websites a couple of nights a week, and work as a dog walker on weekends. Incidentally, having that side gig will make it easier for you to build savings, which the Motley Fool puts as a crucial step in preparing for a recession.
One final thing to consider is to lower your fixed living costs. For example, if you rent an apartment that cost $1,500 you might want to consider downsizing to one that costs $1,000. This way if you are harshly affected by a recession, you have lower expenses to offset any lost of income.
The talk about a potential recession has leaders and citizens worried. There are signs that the economy is headed for a slowdown. However, this could just be a blip in the market, and a recession isn’t in store anytime soon. If Americans start to feel they are in a recession by Nov 3, 2020, it could decide the 2020 presidential race.
You can learn about the implications of trade wars here.