President Harry S. Truman once quipped that he wanted a “one-handed” economist because all his economic advisers said, “on the one hand this, and the other hand that!” Alas, “Give ‘em Hell Harry” would be upset with me.
In writing this column, I initially was very concerned that global problems would stymie our economy. Recently released data, however, have mitigated my anxieties. Specifically, our recently strong stock market reflects a healthy economy, progress on trade talks with China and flexibility by our central banks on monetary policy.
But on the other hand: This month, the World Bank in its Global Economic Prospects forecast that global growth will slow to 2.9 percent this year. The highlights of the report were that international trade and investment are moderating, trade tensions remain and financing conditions are tightening.
We got closer to a tipping point last week with the overwhelming defeat of British Prime Minister Theresa May’s Brexit plan, which could trigger significant regional economic damage. A no-deal Brexit, in which the U.K. exits the European Union without an agreement would hurt the whole region’s economy.
This overseas economic malaise might eventually spill over to the United States, especially if our government shutdown continues much longer.
We do not know whether we will experience a global slowdown or a recession. Economists define a recession as a significant decline in activity that lasts more than a few months and stretches across the economy, affecting everything from industrial production to employment, wages and wholesale-retail trade.
A Market Watch article this month by William Watts with the headline “Is Germany already in a ‘technical’ recession? These economists think so” argued that Germany, Europe’s largest economy, could post a second consecutive quarter of falling gross domestic product. Specifically, its economy could decline by about 1.9 percent. China has been Germany’s top trading partner, and so a Chinese slowdown would have repercussions on its economy. In a Bloomberg Opinion column, “China’s Growth Machine No Longer Looks Unstoppable,” Noah Smith this month cited several factors, including the trade war with the U.S. and retrenchment in China’s real estate and infrastructure sectors. More concerning is his view that China’s system of authoritarian state capitalism is less effective than many had believed. To buttress his argument, he pointed out that China’s total-factor productivity growth — a measure of how fast an economy increases the efficiency with which it uses labor and capital — has remained low for many years. Since China’s working-age population is declining steadily, it can no longer look to human capital to expedite growth. Smith found it ominous that China has diverted resources and investment into inefficient industries and companies — local governments, state-owned enterprises, real-estate projects and infrastructure.
Should Americans be worried that overseas problems will hurt us? The short answer is a resounding “Yes.”
We now face economic headwinds — slowing global growth, weakness in the U.S. housing and manufacturing sectors, a trade war with China and the waning effects of a $1.5 trillion tax cut.
Last Wednesday, the Council of Economic Advisors acknowledged that our partial government shutdown is inflicting far greater damage on our economy than previously estimated. Kevin Hassett, the chairman of the council, said it also was possible that the closing’s damage could grow and could permanently reduce growth expectations if businesses and markets expect frequent shutdowns.
I wish our politicians could bury the hatchet and reach a budget compromise. Given the problems overseas, if they keep their heads in the sand and the government shutdown continues through March 31, it could cut our growth to zero.
This would be intolerable, especially in light of the fact that in 2018 the nation’s economic growth had been the strongest since the 2008 financial crisis.
There’s no “other hand” about it.
Originally published in the Sarasota Herald-Tribune
