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US recession risk hits six-year high mid Trade War, Shutdown

Jan 11 2019 13:23
Katia Dmitrieva, Chibuike Oguh and Catarina Saraiva, Bloomberg

Economists put the risk of a US recession at the highest in more than six years amid mounting dangers from financial markets, a trade war with China and the federal-government shutdown.

Analysts surveyed by Bloomberg over the past week see a median 25% chance of a slump in the next 12 months, up from 20% in the December survey.

The Federal Reserve is now projected to keep interest rates steady in the first quarter, instead of raising them, before two increases total this year - down from four moves in 2018.

The median projection for 2019 economic growth edged down to 2.5% following 2.9% in 2018 as the boost from fiscal stimulus fades.

Growth is still expected to be buoyed by a strong jobs market, rising wages and some lingering effects of tax cuts. If the expansion that began in 2009 lasts until July, it would mark 10 years and become the country’s longest on record.

“It’s not our call that there’s a recession coming soon by any means, but financial conditions have tightened materially over the past two months, you have ongoing trade issues that are weighing on global growth, and you’re seeing business confidence waning a bit,” said Brett Ryan, a US Economist at Deutsche Bank.

He added, “The government shutdown weighs on business confidence and could weigh on consumer confidence.”

Ryan gave a 20% chance of recession, up from 12% in the December survey.

Analysts generally expect the partial government shutdown - which President Donald Trump said could last for months if not years, and is now in its third week - to weaken quarterly economic growth by 0.1 to 0.2 percentage points every one to two weeks it drags on.

It’s already affecting projections. On Thursday, JP Morgan's Chief US economist Michael Feroli cut his first-quarter growth forecast to a 2% annualised pace from 2.25%, citing the shutdown.

The shutdown has also delayed government data releases, such as retail sales and inventories, that investors and analysts use to assess the state of the economy.

That puts more focus on companies such as retailers Macy’s and Kohl’s, who gave disappointing reports on Thursday. Other figures from Johnson Redbook Research showed retail sales rising in recent weeks.

Less optimism among consumers would build on financial-market concern about a broader slowdown.

Sectors where interest rates have been rising, such as the auto industry, will likely take a hit, according to Barclays Chief US Economist Michael Gapen.

He said the trade war with China, which is contributing to overall slowing global trade and has raised prices for some US companies, is also weighing on growth and increasing the risk of a downturn.

us  |  trade war
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