The world’s economy is looking very, very dicey at the moment.
Investors enjoyed a brief, sweet moment of relief from their perpetual anxiety over Donald Trump’s trade war on Tuesday, when the White House announced that it would delay some of its upcoming new tariffs on Chinese goods until mid-December, in order to avoid mucking with America’s holiday shopping season. But this morning, a whole raft of bad news reminded everybody that, oh yeah, we’re very obviously in the midst of a global slowdown. As Bloomberg summed things up:
China reported the weakest growth in industrial output since 2002. Germany’s economy shrank as exports slumped, and euro-area production plunged the most in more than three years as the overall expansion cooled.
Prognosis: not great! There have been other danger signs, too. Britain’s economy shrank during the last quarter, partly thanks to pre-Brexit fears, and appears to be on the cliff’s edge of an outright recession. Then there are the bond markets, which are probably best visualized as a sweaty, red-faced man in an expensive suit shouting, “This sucker is about to blow!”
Desperate for safe places to put their cash in a moment of turbulence, investors have piled into government debt all over the world. As a result, bond prices are skyrocketing, and yields (the returns bond owners can expect) are plummeting. Many bonds are now offering negative yields, meaning that a growing share of the world’s finance types are so pessimistic about the economy that they’re essentially paying for the privilege of having someone hold onto their money.
The bond market is flashing special signs of trouble for the United States, too. For months now, the Treasury yield curve has been inverted, meaning that returns on long-term bonds have fallen below those on short-term bonds. This is generally considered a sign that investors are pessimistic about growth and believe that interest rates in the future will stay low. It has also happened before every single recession over the past 50 years—without generating a single false alarm during that stretch.
In response to Wednesday’s buffet of bad news, the alarm got a bit louder. Yields on 10-year Treasuries fell below those on two-year Treasuries, which basically means that the yield curve is now, officially, extra super-duper uber-inverted.
It is possible, of course, that this time will be different—that the inverted yield curve won’t be followed by a downturn. But there are other reasons to be worried about the U.S. economy, besides abstruse signals coming from Wall St. For instance, U.S. growth slowed in the last quarter as business investment dried up, likely thanks to uncertainty generated by the trade war. And even if Trump may be delaying some of his tariffs, once he imposes them, they’ll still amount to new taxes on American consumers, which could mean yet another slight drag on GDP.
With all that in mind, it seems like maybe … someone … should … think about taking some action to keep the economy from tumbling into a hole?
There are plenty of people who could theoretically step in. The Federal Reserve, for instance, could lower interest rates again. It might be hesitant to do so—when the Fed lowered rates last month, Fed Chairman Jerome Powell hinted that it could be a one-off event. But at this point, it’s not clear what the downside of reducing them further would be. Powell has admitted that inflation has been too low. The chances that it would suddenly rise and spiral out of control are effectively nil. Sure, keeping borrowing costs down might encourage some bad lending or investment bubbles that could lead to problems down the line, but that concern should probably be outweighed by the near and present danger of an actual recession. Some people might also worry that if the Fed cuts now, it won’t be able to cut later should a recession actually arrive—but that concern doesn’t make a whole lot of sense either. We’re better off trying to prevent the economy from veering off into a ditch in the first place, rather than trying to push it back onto the road once we’ve already crashed.
This, for what it’s worth, is what Donald Trump would like to see. On Twitter today, he lambasted the Fed for keeping rates too high and vented about the “CRAZY INVERTED YIELD CURVE.” He’s not wrong.
Of course, Congress could also consider jumping into action. Sure, infrastructure week has become a running joke in America, but seriously, this would be a fabulous time for the United States to stimulate its economy by borrowing a whole boatload of cash and spending it on upgrading our rotting transportation networks. Thirty-year Treasury bonds are trading at around 2 percent right now, and threatening to drop lower—meaning the government can borrow for practically nothing for three decades at a time. Maybe we should take advantage of that? Fix some subways? Repair some roads? Make good on one of Donald Trump’s central campaign promises, even if it mildly hurts the Democrats’ chances in 2020?
Finally, Trump himself could call off the so-far ineffective trade war he’s been waging without much strategy or direction. We know the trade war is causing trouble for American farmers, despite the administration’s bailout. As I mentioned above, it’s also pretty clearly hurting domestic business investment. And as Neil Irwin writes at the New York Times, it’s driving global trouble too. Our tariffs seem to be putting a dent in China’s factory production and scaring Chinese consumers out of spending. Trump almost surely sees this as a plus, but as a result, Germany is exporting fewer cars to the People’s Republic, which is weighing on its own growth, which is bad for all of Europe. And the weaker the world economy gets, the more likely it is that companies everywhere will cut back on hiring.
Things are looking a little bleak at the moment. The good news is that there are several ways to brighten the picture. Cut interest rates. Borrow and spend money to build stuff. Stop trying to mindlessly bludgeon our trade partners. Somebody just has to take some responsibility and do something.