Oops. When US president Donald Trump swept to power two years ago, he announced that there was no reason why his administration could not deliver as much as a “4 per cent, 5 per cent, and even 6 per cent” growth rate.
On Thursday, however, the US government revealed that lofty goal is still a mirage: its initial estimate for 2018 fourth-quarter gross domestic product growth was just 2.6 per cent, down from previous quarters.
To be fair, this was slightly better than market predictions, and left the economy expanding by 2.9 per cent during 2018. That is perfectly respectable by the standards of recent American history, let alone for the western world. Italy, say, would be thrilled if it could deliver this figure.
But more notable than 2018’s GDP growth is that pundits fear 2019’s numbers could be far lower.
A recent survey of American chief financial officers by Duke University, for example, revealed that half of its respondents expect a recession by the end of 2019 — rising to 82 per cent by the end of 2020.
“The end is near for the near decade-long burst of global economic growth,” warned John Graham, a finance professor at Duke’s Fuqua School of Business.
A separate survey from the National Association for Business Economics released this week painted a slightly better picture. The report noted that “only” 10 per cent of the economists it surveyed foresee a downturn in 2019; 42 per cent by the end of next year. To put it another way, few observers expect Mr Trump to fight the 2020 election with his promised 4 per cent growth rate. Indeed, he will be lucky to see growth then at all.
A cynic (or a White House official) might blame this on the dismal profession behaving needlessly dismally. There could be some truth to that, given there are at least two subtle psychological factors that could be distorting the way both economists and executives view the economy.
One is the weight of history. Since the second world war, American recoveries have lasted on average only 58 months. (Some countries, such as Australia, have expanded for longer periods.) But what shapes the instincts of US economists and business leaders is their lived experience — and that makes them instinctively worried that this decade-long recovery will run out of steam.
A second distorting factor is that many observers find the current geopolitical scene terrifyingly disorientating. They are ill-equipped to analyse how rising populism, trade wars (and even real wars) will impact their economic models. They also know that quantitative easing has tipped the global financial system into uncharted waters.
It is thus no surprise that when business leaders assembled at the World Economic Forum in Davos in January they expressed deep alarm about the medium-term outlook, but also strong confidence in their current economic prospects. This dichotomy has started appearing in American surveys. Take that Duke report: although chief financial officers are worried about a recession, their top concern is to find enough staff in an overheating economy and labour market. This seems a tad contradictory, notes Catherine Mann, chief economist at Citi.
But leaving aside these issues of psychology, there are some tangible reasons to worry. As Jay Powell, chairman of the US Federal Reserve, noted last week, growth in places such as China and Europe is slowing and global liquidity conditions have tightened.
More important still (but less widely discussed) is the issue of American fiscal policy. The $1.5tn tax cuts which Mr Trump unveiled with so much fanfare in late 2017 delivered a significant boost to growth in 2018. But this will fade away in 2019 and 2020, creating a potential fiscal drag. The Trump administration insists that deregulation reforms will provide a new spur to growth. But this week’s GDP data showed that growth in business investment and consumer spending is already slowing down. More recently, there have been flashes of consumer pain in areas such as subprime car loans.
By themselves, these slightly weaker data points do not prove that a recession is looming yet. After all, the weakness may have been amplified by the recent government shutdown. But the key point is this: in the wake of these GDP numbers, economists and executives alike will be frantically scouring incoming data for hints of looming trouble.
And, as this hunt for canaries in the coal mine intensifies, the markets are likely to remain distinctly volatile. Investors should stand warned; we are now on dead canary alert.