Last week, the Dow Jones Industrial plummeted 800 points, the single largest drop of 2019 to date. It caused a fair amount of worry among consumers, especially those who keep a close eye on their portfolios, and also prompted many economists to warn that an economic recession was likely on the way unless things changed in the meantime.
Trump Administration officials did their best to temper consumer anxiety when making the rounds on the Sunday morning political talk shows, reciting prepared talking points on the strength of the economy and U.S. dollar, but there were still a lot more questions than answers come Monday.
This most recent week didn’t deliver much more good news in terms of the economic outlook, as China imposed more tariffs on U.S. goods, prompting President Trump to go on a Twitter rant about how he was ordering U.S. businesses to begin immediately looking at alternatives to China for material sourcing. In part because of this, the Dow finished the week down more than 600 points from where it started the day.
If last week’s stock market activity wasn’t enough to catch the attention of consumers, how this week wrapped on Wall Street certainly is. In fact, this recent activity has left some economists predicting that there’s anywhere between a 50 and 75 percent chance that the U.S. will see an economic recession in 2020. There are a variety of factors at play here that are possibly leading up to it. We’ll take a closer look at several of them here:
- Trade war with China: If you told many economists that we’d currently be engaging in a tit-for-tat with China in August 2019, especially after an agreement appeared to be within reach earlier this year, they probably would have shot you a bewildered look. But the trade war has only escalated in recent weeks, which certainly isn’t great news for the global economy considering the U.S. and China are the world’s two largest economies. The trade war has led to an overall slowdown in manufacturing, which we’ll cover in our next bullet point.
- Stalled manufacturing: According to IHS Markit, factory activity declined in August 2019 for the first time in 10 years, and many economists believe the U.S., China trade standoff is escalating this slowdown. In recent months, unemployment claims in manufacturing Midwest hotbed states have increased by about 5 percent, and many believe the slowdown in manufacturing is likely to also lead to reduced consumer spending down the line.
- Looming $1 trillion budget deficit: It wasn’t long ago that the budget deficit was at around $500 billion and getting closer to a breakeven point. But U.S. spending has only gone up since, largely due to many programs that were intended to boost spending and economic activity, such as the U.S. Tax Cuts and Jobs Act. But many economists are now saying that this Act, which took effect in 2018, came about too quickly and should have been instituted during a period of slow activity — and not during a time of growth. Now, the U.S. is staring a rising deficit in the face without any increase in government revenue.
The Trump Administration has pointed the finger at many parties for the slowing economy, all while maintaining that it’s strong. Federal Reserve Chairman Jerome Powell has often drawn the ire of the President during these recent tumultuous weeks, and of course the President isn’t mincing words when it comes to China either.
Many economists, however, believe a recession can be averted by coming to an agreement with China, which is why it’s interesting that President Trump isn’t working harder to reach an agreement. This is especially interesting since his biggest talking point in the upcoming election cycle is (was?) likely to be the strength of the economy. That’s now in jeopardy, and while economists believe that any 2020 recession won’t be nearly as damaging as the Great Recession from a decade ago, it’s certainly still going to hurt consumer spending and personal portfolios.
Regards,
Ethan Warrick
Editor
Wealth Authority
