Recently, most major indicators have turned negative. As a consequence, the global-growth slowdown has frightened investors. In recognition of this malaise, the stock market has been flat for the past 12 months.
To ward off an impending recession, central banks throughout the world have slashed key interest rates. Our federal reserve has cut interest rates twice and is expected to reduce rates further.
In a capitalist economy, we experience four stages — expansion, peak, contraction, and trough. The global economy has done well over the past decade; however, for a variety of reasons we should expect a slowdown.
Optimists point out that while yellow lights are blinking, it is too early to throw in the towel. Bulls point out that our economy should grow above 2% this year, energized by strong consumer spending and our jobless rate reaching a 50-year low.
Pessimists warned that the manufacturing index hit its lowest level in more than a decade. Weakness in the manufacturing sector is now spreading to the service sector, which represents about 80% of U.S. output. The Institute for Supply Management tracks the service industry — health care, finance and restaurants, etc. It reported a drop to 52.6 in September, a three-year low.
Investors both applaud and criticize the actions of President Trump. Specifically, investors favor the president’s advocacy of the Federal Reserve lowering interest rates. During Trump’s first three years of office, America has enjoyed near record-low levels of unemployment, and a solid GDP growth. By contrast, they blame the president for turning his back on globalization, disrupting the global supply chain, and levying tariffs on almost all of our major trading partners.
Richard Baldwin, a professor of international economics at the Graduate Institute of Geneva, pointed out that U.S. is having a trade war with China, Europe, Japan and even our NAFTA partners.
Europe’s economic growth slowed to 0.2% last quarter, adding pressure on the European Central Bank to intercede to prevent a possible recession. The Eurozone manufacturing index reached a seven-year low. Its service index, representing 74% of the European economy, fell to 51.4 last month.
Germany, Europe’s biggest economy, has been hit the hardest by the trade wars. Claus Michelsen, head of forecasting and economic policy at the German Institute for Economic Research, said, “German industry is in recession, and this is now also impacting the service providers catering to those companies.” A disorderly Brexit would cause a further reduction in the German GDP. Going forward, Germany will be hurt by new American tariffs.
The Wall Street Journal in an article — For a Change, It’s the World that is Pulling Down the U.S. Economy — emphasized that the U.S. is no longer immune from foreign forces. First of all, as the economies of China and India have grown, the United States share of the global economy has shrunk.
Secondly, because of fracking, oil and gas production has become a major component of U.S. investment. However, in recent months fracking has declined because of lower oil prices.
Thirdly, integrated capital markets mean U.S. interest rates depend more heavily on conditions abroad. Currently, some $15 trillion of sovereign debt trades at negative interest rates. As a consequence, foreign investors are buying U.S. debt and making our dollar stronger. In turn a stronger dollar makes our manufacturing goods less competitive. The Euro briefly sank below $1.09 recently, the lowest level since May 2017.
The world has turned over many times since my college days. I earned three degrees both in business and economics. During those six years, I never even heard a lecture, let alone a class, discussing international trade or capital flows. Instead of worrying about Europe or China, my focus was on the fortunes of my beloved Texas Longhorns and girls.
Originally published in the Sarasota Herald-Tribune
