Although Optimism About The Economy Abounds, Don't Rule Out An Election-year Recession

Five decades of economics have taught me trouble comes when you least expect it, and the Federal Reserve, Treasury and their brethren abroad are often clueless about what to do.

Government officials, business leaders and academics privileged to attend Davos or the Fed’s annual conclave at Jackson Hole are convinced that President Trump’s trade wars and Boris Johnson’s Brexit campaign created great uncertainty, hammered down investment and were root causes of slow growth.

Now, the Phase-One deal with China and Mr. Johnson’s masterful ascent, along with corporate tax cuts and deregulation, have the administration expecting good times for the president’s reelection campaign.

Boeing’s 737 Max production shutdown will knock half a point off first quarter U.S. growth. Experience with SARS and China’s enlarged role in global supply chains indicates a 3 percentage point reduction in its GDP from the coronavirus could reduce U.S. growth by 0.3 points.

Even before the coronavirus, China’s growth was slowing under the weight of too much debt from wasteful state-directed investment and real estate development. Now the epidemic has made plain the economic costs of diverting government funds to the military and efforts to pirate Western technology from badly needed public investments like hospitals.

The EU’s largest economies are in a permanent funk. Manufacturing is one quarter of Germany’s prosperity and terribly dependent on gas-powered automobiles, Italy is in perpetual political dysfunction and both have chronically troubled banks. No one can govern France.

The U.S. economy could expand as little as 1 percent in the first quarter. Given that some sectors like health care grow no matter what, that implies others could dip into recession — read autos and restaurants.

An aging global population is saving a larger share of GDP and money looking for yield is moving into real estate in global cities like New York, London and Vancouver — creating the danger for another bubble then bust. Those additional savings are a significant drag on demand for goods and services in all the major economies, and that requires much bigger government deficits to make up the difference than are in the cards.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster ...

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