Economy Is Strong. Leadership Is Shaky. Which Will Win Out in 2019?
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Version 0 of 1. Sometime in the last couple of months, predictions of a major economic downturn or recession in 2019 went from being a crank view to the conventional wisdom. It is true that the global economy is sputtering, and that the stock market is in its worst pullback in a decade, with the Standard & Poor’s 500 index down more than 19 percent since Sept. 20 as of Monday’s close. But this sense of gloom and pessimism has gotten ahead of the facts on the ground, especially concerning the United States economy. The real risk is not that insurmountable challenges knock the economy off course. It is that poor leadership converts moderate economic shocks into a crisis. The combination of erratic behavior from the president and a thinly staffed government in the United States; the potential crises facing other major economies; and the lack of trust amid allies and major trade partners could make routine economic challenges turn into something worse. Surveys show rising pessimism among top corporate executives. And over the weekend Treasury Secretary Steve Mnuchin called bank C.E.O.s to seek assurance that their institutions were sufficiently liquid to keep lending to consumers and businesses, according to a Treasury announcement. It was the kind of disclosure that risked causing more damage than it was intended to prevent. If a top health official announced that he had convened conversations with top pharmaceutical C.E.O.s and was pleased to learn there were no drug shortages, your first response would not be relief but to ask, “Wait, we need to worry about drug shortages?” Then there are the president’s repeated attacks on a Federal Reserve led by his own appointees. Just in the last three days, that has included reports that President Trump has discussed the legally dubious move of trying to fire the Fed chairman Jerome Powell, efforts by administration officials to play down that possibility, and a renewed presidential Twitter attack Monday morning. It all raises the possibility that if things do get worse, the United States government will be an agent of chaos rather than the source of steadiness and calm it is normally known for during crises. It is a lack of confidence in global leadership that explains this paradox: an economy that is doing this well and yet widespread conviction that things are about to turn bad. The unemployment rate is near a five-decade low, as is the rate at which people are filing new jobless claims. The American consumer appears strong; this is looking to have been one of the strongest holiday sales seasons in many years. Surveys of supply managers, which act as an early warning system for slowdowns in business activity, are in strongly positive territory. In the Institute for Supply Management’s surveys, an index above 50 indicates the economy is in expansion; its most recent reading was 62.1 for the manufacturing sector and 60.7 for services. The most concrete warning signal is coming from financial markets. But the bond market is generally more closely tethered to economic ups and downs than the stock market, and while it is suggesting slower growth ahead, it is not at recessionary levels. For example, the two-year Treasury bond yielded 2.56 percent at Monday’s close. That’s still higher than the roughly 2.4 percent where the Fed’s benchmark overnight rate now sits. You would expect that if a recession were imminent, the two-year yield would fall lower, reflecting expectations of Fed rate cuts to combat the downturn. At this point in December 2007, which we now know was the beginning of the Great Recession, the Fed’s target interest rate was 4.25 percent. But the bond market was already pricing in more cuts in the years ahead, with the two-year yield ending the year at 3.12 percent. Most economic and financial indicators are not pointing toward some economic collapse in 2019, but rather to a return to the kind of moderate economic growth that was completely normal from 2010 to 2017. In this story, 2018 has been the aberration — fueled by a commodity boom and the temporary effects of tax cuts. To the degree there is a market correction and adjustment in business sentiment, it is about realizing that we’re returning to the old new normal. There are some rumblings of things that could go wrong in the financial system. Companies that loaded up during the era of ultralow interest rates are facing high debt burdens. Some may find themselves in bankruptcy. Oil prices have fallen enough that it seems it will be a tough 2019 in energy-producing areas. But the biggest worry for 2019 is not so much that any of these disruptions proves so large as to cause a recession. The real fear is that shaky policy allows small shocks to create a broader crisis of confidence. Beyond the attacks on the Fed and odd communication from the Treasury, there are other risks from Washington. Further escalation of the trade war — including into the economically consequential automobile industry — remains a distinct possibility. Divided government could lead to paralysis. Major nations worldwide are facing profound challenges, including a potential Brexit disaster in Britain, protests in the streets in France, budget standoffs between Italy and European leadership, and some signs that the leadership of the Chinese president, Xi Jinping, is being challenged because of the trade war with the United States. It is quite a contrast with the 2008 crisis, when the United States government was stocked with highly experienced economic policymakers and a president who trusted their judgment, when no one had heard of Brexit, and when a trade war seemed unfathomable. At a crucial juncture in October 2008, finance ministers of the Group of 20 major economies issued a statement at a meeting in Washington in which they “committed to using all the economic and financial tools to assure the stability and well functioning of financial markets,” and to “ensuring that actions are closely communicated so that the action of one country does not come at the expense of others or the stability of the system as a whole.” It was a key moment in ending the 2008 crisis. Given geopolitical developments since, it is hard to imagine that harmony happening today. It’s easier to imagine conflicting signals and an every-nation-for-itself breakdown of communication. But we’re not there yet. And throughout the expansion of the last nine-plus years, the United States economy has proved stubbornly resilient to challenges, whether the chaos of the eurozone crisis in 2010 or a commodity collapse in 2015. The boom year of 2018 may be unlikely to repeat itself, but if leaders in the United States and overseas keep their wits about them — far from a guarantee given recent events — there’s no reason 2019 needs to be a bad year. The question is which will prove more important, the economic fundamentals or leadership. And to be an economic optimist means counting on the fundamentals to prevail. |