The US economy is indeed a very dark place these days. Increasing recession probabilities and a never-ending trade war are providing plenty of external turbulence. Goldman Sachs has increased its likelihood of a recession to 45%. This represents a dramatic increase from their previous prediction of 35%, due in large part to recent tariff announcements as lenders re-evaluate the economic underlying assumptions. For example, JPMorgan Chase recently increased its recession odds for the US and global economies to 60%. This shift is an acknowledgment of growing concerns about the economic outlook.
This precarious situation comes despite recent, bipartisan tax reform that has the potential to do a lot of good. Unfortunately, the pernicious effects of tariffs and trade wars make matters more complicated. That gap between lackluster growth and recession seems to be closing fast, as noted by Analysts will soon be left to navigate the impacts of a quickly evolving economic reality, the effects of which may be felt for generations.
Impact of Tariffs and Trade Wars
The highly distortionary new tariff regime in the United States is projected to continue to play a significant drag on new growth outlook. As trade tensions continue to rise, increasing uncertainty across industries, economic growth remains fragile. That uncertainty is weighing down on business investments and consumer confidence. It wasn’t supposed to be this way President Trump’s administration first proposed these tariffs. Now, Democrats and Republicans alike find themselves in uncharted territory as they watch the analysts’ handiwork.
Goldman Sachs had only a 20% chance of a recession predicted before the announcement of these tariffs. In light of the increasing trade confrontations, that would be too rosy… at least until recently. The state bank’s recalibrated forecast reflects the souring mood of a once-optimistic band of economists. They are getting much pickier that their one-size-fits-all tariffs don’t help their economy perform.
“Disruptive US policies have been recognized as the biggest risk to the global outlook all year,” – JPMorgan Chase
JPMorgan Chase’s analysis highlights the long-term impact of US trade policies, showing that it’s having effects well beyond the US borders. When China and other economies respond to American tariffs it’s perceived as a terrible thing. Because of the interconnectedness of global trade, these challenges are sure to compound rather than stay in isolation.
Tax Reforms and Their Mixed Effects
Despite tariffs being a serious threat, some analysts are optimistic about positives that are expected to come out of recent tax reform. These business tax reforms will stimulate economic growth by enabling companies across all sectors of the economy to keep more of their hard-earned profits to reinvest. This would stimulate development in domestic industries, helping to balance some of the negative impacts caused by trade wars.
These economists have good reason to be hopeful, especially about revenue-neutral tax reforms. They contend that these reforms won’t be nearly enough to counterbalance the negative effects of the administration’s trade wars. Some industries or companies will benefit more than others from these tax incentives. Regardless of their potential, too many will struggle to succeed with robust growth in a new economic environment defined by steep tariffs and retaliatory actions.
Force one and force two The opposing forces at work in the economy paint a complicated picture. These are hopeful signs that tax reforms can have positive and encouraging effects. With the current trade tensions, serious questions remain about sustainability and long-term growth.
Federal Reserve’s Dovish Stance
Given all of these movements, the tenor of the markets—and a lot of speculation—has changed around Federal Reserve policy. Equities and other financial markets continue to react to the Fed’s more dovish projections. As such, the chances of a 25 bps monetary cut in May have already risen to almost 70%. Some analysts assume this is the Fed’s attempt to provide a 50-cent word tonic. They see this move as a direct response to rising concerns over an impending recession.
Even Federal Reserve Chairman Jerome Powell has acknowledged that outside predictions are starting to catch up with the increased risk of recession. He stated, “We don’t make a probability forecast of how likely it is for there to be a recession, but many outside forecasters do and many of them have raised the likelihood, albeit from very low levels.” This recognition from the Fed is a promising sign that they’ll be open to adjusting the direction of monetary policy as economic conditions change.
Consequently, the dovish expectations surrounding Fed policy have proven to be a significant source of downward pressure on the US Dollar. With a renewed risk sentiment taking root in financial markets, demand for safe-haven assets including the Dollar has eased. Traders are in unchartered waters at the moment. Their appetite for opportunity continues as the economic indicators go up and down, causing demand for greenback to drop off.