Will a Global Recession Derail the U.S Economy—or Vice Versa?
U.S. stocks surged to record levels and the U.S. dollar gained momentum the day after President Trump made his first address to Congress, on a wave of optimism about the U.S. economic outlook for 2017. While many believe the U.S. economy is poised for serious growth under the Trump administration, ongoing fears of a global recession in 2017 could derail that dream.
By all accounts, the last thing most Americans expect to see in the U.S. in 2017 is an economic recession let alone an economic collapse. Stocks are at record levels, unemployment is under five percent, corporate America is optimistic, and consumer confidence is high.
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But serious cracks remain in the U.S. economy and there are growing fears that Donald Trump’s protectionist policies will undermine U.S. economic growth and lead to a recession. Moreover, dark clouds also continue to hover over the global economy, and investors should be equally as concerned about a global recession cobbling the U.S. economy in 2017. Will a global recession spill over to the U.S. and result in an all-out U.S. economic collapse in 2017?
The U.S. may be the biggest economy in the world, but it relies heavily on the rest of the world for trade. The U.S. is the third-largest exporter in the world (behind China and the European Union) and is the second-largest importer (behind the European Union). In 2016, U.S. trade with foreign countries was $4.9 trillion. Of that, $2.2 trillion, or 44%, was in exports; $2.7 trillion, or 56%, was in imports. (Source: “U.S. Trade in Goods and Services,” U.S. Census Bureau, last accessed March 1, 2017.)
What this shows is that the U.S. is not an economic island. What happens outside our borders will have an economic impact on what happens inside our borders. As a result, a global recession could derail President Trump’s ambitious goal of generating sustained annual gross domestic product (GDP) growth of four percent.
Global Economy on the Precipice of a Recession
A global recession does not mean the entire planet is in a recession. But a broad-based economic slowdown does impact the major economies, which help fuel global growth. Since the end of WWII, there have been four global recessions: 1975, 1982, 1991, and 2009. They each lasted a year, but the 2009 Great Recession was, by far, the most damaging with regards to the number of countries affected and the decline in global GDP.
When it comes to defining a recession, the general rule of thumb is two consecutive quarters of negative GDP. It’s a little more difficult to define a global recession. According to the International Monetary Fund (IMF), during the last three global recessions, global capital output growth was zero or negative.
Despite being almost eight years into a period of expansion, the global economy can hardly be said to be healthy. In fact, global economic growth is pretty anemic and teetering on a global recession.
Unless there is solid GDP growth, we could see another global recession in 2017, which would have a dire impact on the U.S. economy and stock market.
According to the Organisation for Economic Co-operation and Development (OECD), the global economy is projected to advance just three percent in 2017. For OECD countries, global growth will increase a much more modest two percent. (Source: “General Assessment of the Macroeconomic Situation,” Organisation for Economic Co-operation and Development, November 27, 2016.)
Economic powerhouses like the U.S. (the world’s biggest economy) and Germany (fourth-biggest economy) might not even reach 2017 GDP growth of two percent. GDP from the eurozone, the world’s largest economic region, is expected to be a princely 1.6% in 2017. Japan (third-largest economy) meanwhile, will churn out 2017 GDP of one percent.
China, which is a non-OECD country, is projected to report 2016 GDP of 6.4%. That sounds pretty good compared to the rest of the world, but that represents the worst growth in a quarter of a century.
Don’t expect the global economy to pick up much steam in 2018. Global GDP will rise to 3.6% with OECD countries advancing 2.3%. But again, the economic powerhouses will underperform. In the euro area, GDP will be 1.7% and Japan’s GDP will fall to 0.8%. China’s GDP will tumble to 6.1%.
Even those numbers are in jeopardy. The OECD believes that if Donald Trump’s proposed tax cuts and spending fail to ignite the U.S. economy, global growth could slow by 0.4% more than projected in 2017 and by 0.6% in 2018.
The IMF is bullish on the global economy in 2017 and 2018, but only if President Trump’s economic policies work and don’t result in a trade war, which the IMF contends, will be “quite destructive” for the global economy.
With this in mind, the IMF expects the global economy to expand 3.4% in 2017 and 3.6% in 2018. This is a slight increase over the 3.1% growth in 2016; which was the weakest year for growth since the Financial Crisis. (Source: “World Economic Outlook,” International Monetary Fund, January 16, 2017.)
Is a Global Recession Inevitable Under Trump?
Some believe a global recession is even more inevitable so long as Donald Trump is in the Oval Office. Anton F. Börner, the head of Germany’s exporters’ association, said President Trump was power hungry and could tip the world into a global recession.
He maintains that Trump’s trade barriers, especially against China, would have a “catastrophic effect” on Germany. The U.S. is Germany’s biggest destination for exports. Germany also happens to be the world’s leading export country.
Nobel prize-winning economist Paul Krugman warned that President Trump would wreak havoc on the still-fragile U.S. economy. The U.K.’s The Independent said, “Donald Trump’s first gift to the world will be another financial crisis.” Meanwhile, Willem Buiter, chief economist at Citigroup Inc., noted that Trump’s protectionist measures, could “easily trigger a global recession.” (Source: “One of Trump’s major economic polices could lead to a ‘global recession’,” Business Insider, November 13, 2016.)
Trump’s Tariff Nightmare?
Will President Trump’s economic polices really be a nightmare for the U.S. and global economies? The American public, and the rest of the world, got its first look at what a Trump presidency will look like on February 28, 2017, when he gave his first presidential address to Congress.
President Trump is not going to be a pushover when it comes to his “America First” platform. His tough protectionist measures came to fruition when he promised a $1.0-trillion infrastructure program that “will be guided by two principles: Buy American and hire American.” (Source: “Trump pledges ‘buy American’ measures in address to Congress,” The Globe and Mail, February 28, 2017.)
Trump buckled down on his campaign trail promises, insisting that American companies face hostile, discriminatory trade barriers. The best way to counteract that is to slash corporate taxes and revamp trade policies.
His job as president, he said, is to represent the United States, not the world.
On the campaign trail, he said he would consider imposing a tariff of 35% on U.S. companies that move jobs overseas and a 45% tariff on goods coming in from China. He has also said he is considering imposing a five-percent tariff on all imports into the U.S. (Source: “Trump is reportedly considering a 5% tariff on all imports,” Business Insider, December 22, 2017.)
Trump offered little detail on trade barriers when he addressed Congress. What is clear, however, is that it is going to be a lot more difficult for foreign companies to do business in the United States.
Trump’s end goal, of course, is to kick-start the U.S. economy back to the days of sustainable annual GDP growth of four percent. The best way to do that, he believes, is to make the U.S. as pro-business as possible. Tax cuts will allow companies to make more money and increase R&D spending. This will lead to increased productivity, wages, and jobs.
To be fair, Trump is starting from the ground-up. President Obama didn’t leave Trump with the strongest economy. GDP was just 1.6% in 2016 and since the Great Recession, GDP has advanced at an average 2.3%. Obama also handed Trump a national debt of almost $20.0 trillion and deficit broaching $600.0 billion.
Trump’s tax cuts and infrastructure spending could help him achieve his goal of four percent annual GDP growth, but it’s going to be a tough haul.
America First will bring jobs to America, but it could also ignite a trade war with the entire planet. In addition to tariffs against China and Mexico that range from 20% to 45%, Trump has killed the Trans-Pacific Partnership (TPP) and plans to rip up NAFTA. Ultimately, undercutting global trade could lead to higher prices here in the U.S and trade wars that will seriously damage corporate America.
It might not be as much of an uphill battle if the U.S economy was doing well, but it isn’t. 2016 GDP was just 1.6%, the worst performance since 2011. Unemployment is below five percent but most of the jobs created during the so-called recovery have been part-time, low-paying jobs. Of the 11 million jobs created during Obama’s reign, an equal number of working-age Americans have stopped looking for work.
Household debt is at its highest levels since hitting a peak in 2008. Household debt has increased by 11% over the last 10 years to an average $132,529. (Source: “Household Debt Nears Pre-Recession Levels,” NASDAQ, January 4, 2017.)
That debt is going to become even more crippling when interest-sensitive credit rises in 2017. Stretched household budgets could crumble with half of all Americans (47%) unable to come up with an emergency expense of $400.00. (Source: “66 million Americans have no emergency savings,” CNBC, June 21, 2016.)
Having to pay more for imported goods could have a crippling effect on the weak U.S. economy and tip it into a recession in 2017.
A Stock Market Crash in 2017
If Trump is looking for a vote of confidence, the stock market is it. Since the November 2016 election, the stock market has defied expectations and rallied to record levels with investors betting that Trump’s economic policies will be good for corporate America and the U.S. economy. And stock market crash predictions for 2017 are that the S&P 500 and Dow Jones Industrial Average will continue their bullish ways in 2017. Those calls may be more than a little premature.
Unfortunately, those massive gains have made stocks more expensive. And deep down, President Trump cannot be overly happy about that. Recall if you will, in April 2016, Trump said he had little faith in the stock market, it was a terrible time to invest, and a huge recession was coming. Five months later, during the first presidential debate, Trump said the bull market was “in a big fat ugly bubble.” (Source: “Donald Trump Predicts Massive Recession,” The Washington Post, April 2, 2016.)
Stocks are a lot higher since he made those comments. And valuations are at nosebleed levels. According to the Shiller CAPE P/E ratio, the S&P 500 is overvalued by 84.75%. The ratio is currently at 29.56; the long-term average is 16. (Source: Case Shiller P/E Ratio, Yale University, last accessed March 1, 2017.)
The Case Shiller P/E ratio has only been higher twice, in 1929 and 1999. Before Black Tuesday in 1929, it was at 30. In 1999, the ratio was at 45.
The market-cap-to-GDP ratio, also called the Warren Buffett Indicator, suggests stocks are significantly overvalued. The market-cap-to-GDP ratio is 131.8%. A 100% reading shows stocks are fairly valued. The higher the reading over 100%, the more expensive stocks are. The Warren Buffett indicator has only been higher once since 1950. In 1999, it was at 153.6%.
Both of these indicators suggest equities are significantly overvalued and vulnerable to a serious correction or stock market crash if President Trump’s economic polices don’t deliver the corporate profits and four-percent GDP gain he promised.
Taken together, this could undermine consumer and investor confidence and send the U.S. into a recession in 2017.
The big question is, what comes first? Both the global economy and U.S economy remain fragile, and dependent on each other. So, will the U.S. fall into a recession and take the rest of the world with it, or will there be a global recession that spills over into the U.S.?
