Rumblings of Recession Get Louder

What appeared as distant rumblings of economic trouble have in recent weeks turned into a stampede, with most major indicators pointing to a generalized, global economic slowdown. Most recently, the key U.S. manufacturing index hit its lowest point in more than a decade, a sign of how U.S. President Donald Trump’s trade wars have become a self-inflicted wound that threatens to send the economy into a tailspin just in time for his reelection campaign.

The Trump administration likes to boast about the strength of the U.S. economy—one of the few successes the administration has arguably had in nearly three years in office—given near record-low levels of unemployment, steady GDP growth, and a buoyant stock market. In reality, Trump’s concerted effort to turn back globalization, upend global supply chains, and levy tariffs on almost all major trading partners has sown uncertainty throughout the U.S. and global economies, with disastrous consequences for the manufacturing workers and farmers who helped vote him into office.

“There is a global slowdown in manufacturing, and I do think it’s related to Trump’s war on trade,” said Richard Baldwin, a professor of international economics at the Graduate Institute in Geneva. “It’s not just an issue between the U.S. and China, but between the U.S. and Europe, between the U.S. and its NAFTA partners, and between the U.S. and Japan as well.”

Trump administration officials such as White House economic advisor Larry Kudlow blame the media for talking up a recession, but in reality it’s manufacturers who are talking about falling orders—especially for exports—and bulging warehouses, sending the U.S. purchasing managers’ index to its lowest level since the depths of the Great Recession a decade ago. Of the 18 manufacturing sectors tracked by the index, 15 showed contraction in the latest survey; in some sectors, such as metal firms hammered by Trump’s tariffs on steel and aluminum, bankruptcies have begun. Farm bankruptcies, collateral damage from Trump’s trade war with China, have been rising for a year.

Trump has taken to blaming the Federal Reserve and the expanding impeachment probe for the bad manufacturing numbers and recent stock market declines, even though most businesses and investors have made clear the problem is Trump’s own economic policies. On Friday, the jobs report showed fewer new jobs in September than expected, compounding a three-month stretch that is the most sluggish since 2012, even though the unemployment rate remains extremely low.

But the malaise isn’t limited to the United States. Almost every developed economy and many emerging economies are feeling the pain. The eurozone manufacturing index reached its own seven-year low—with Germany, Europe’s biggest economy, hit hardest—leading to falling manufacturing employment. Economists fear the manufacturing slump will bleed into larger sectors of the economy, namely services.

The latest data for big Asian economies such as Japan and India also shows contracting manufacturing sectors—both victims of gnawing uncertainty thanks to trade tensions. And China, the world’s second-largest economy, posted its slowest growth in almost three decades in the second quarter, and it is watching exports decline despite a cheap currency. The World Trade Organization just downgraded its growth expectations for this year and next due to the wave of protectionism sweeping the globe.

“Manufacturing in the global economy, and especially in advanced economies, is less important to overall GDP and employment than it used to be, and so the potential spillover to the rest of the economy and consumer spending is not as serious as it was,” Baldwin said. “But the slowdown in manufacturing is for real, and it is hitting all the main manufacturing countries—the United States, Germany, Japan, and China.”

But the global economic turmoil isn’t just found on the factory floor. Consumer confidence across developed economies is falling, though it’s still far above the levels seen during the last recession. The sluggish economy means less demand for oil—the International Energy Agency may further cut its expectations for growth in oil demand—which in turn is putting the hurt on producers from Saudi Arabia to Iran to Texas. This week, another important U.S. index measuring the strength of the services sector fell to its lowest level in three years, a sign that the manufacturing slump may be weighing on the bulk of the economy.

And there are still other warning signs of trouble. U.S. corporate debt is at its highest levels relative to GDP in history, even as earnings are weakening, making it harder to pay off loans and stay solvent; hard-hit retailers are increasingly going broke in what Bloomberg calls a “retail apocalypse.”

Why is everything apparently going south? On the one hand, it’s been a decade since the trough of the last recession, with the economic expansion in the United States particularly long-lived. Cyclically, what goes up must come down at some point, and that explains some of the weakening in global output and demand.

At the same time, there are some exceptional causes of uncertainty that are weighing on business and consumer sentiment. Britain and Europe have been convulsed for three years by Brexit, and with just weeks to go before the nominal deadline for the United Kingdom’s departure from the European Union, it’s still not at all clear what will happen or when. That uncertainty has hastened the decline of the British pound, which has lost almost half its value against the U.S. dollar since the Great Recession, but also makes it hard for European companies that do business with Britain to plan investments or hire new staff.

But by far the biggest reason for the slump, experts say, is the global trade war unleashed by Trump’s desire to roll back decades of globalization and break up cross-border supply chains that nearly every industry relies on. That’s especially acute with China, where Trump has announced tariffs on practically everything it exports to the United States. And with the China tariffs, the real pain hasn’t even hit yet: Trump deferred steeper tariffs on Chinese consumer goods until later this year.

Trump’s apparent willingness to sunder the country’s economic relationship with China—rather than pursue some sort of trade deal—is perhaps the biggest dose of uncertainty U.S. and global business faces.

“It’s so much more severe than just a trade war—the entire U.S. security apparatus is talking about disentangling from China,” said Adam Tooze, an economic historian at Columbia University. “It’s not the specifics of tariffs, it’s whether we are looking at a more fundamental shift.”

Of course, there’s more trade mayhem than just China. Trump pulled out of a huge Asian trade pact, threatened to destroy NAFTA before giving it a fresh coat of paint, and has paralyzed the World Trade Organization’s ability to settle disputes. Most importantly, he’s dusted off old legislation to slap tariffs on friends and allies with abandon.

Adding to the uncertainty are Trump’s threats to impose tariffs on a host of additional items, including cars and car parts, Mexican imports, and European wine and cheese. On Wednesday, the trade war between the United States and Europe ramped up yet another notch as the WTO gave the United States the legal go-ahead—a first for the Trump administration—to levy tariffs on up to $7.5 billion in European goods over Europe’s state support for Airbus, the plane manufacturer.

If the signs of a global slowdown do turn into a full-blown recession—and some sectors in some countries are already contracting—that would clearly be bad news just a decade after the worst economic crisis since the Great Depression. In many parts of the United States and Europe, despite a slow and steady recovery from the depths of the 2008 to 2009 recession, many families never regained economic security. Even in parts of Europe that have shown decent growth lately—such as Spain—the recovery is fragile, and consumer confidence is now falling sharply.

“There’s a real worry about the political stability of the eurozone,” Tooze said. “The damage is still there from the last recession, the political fallout is still there, and the last thing the eurozone needs is another economic crisis.”

For Trump, already grappling with a rapidly expanding impeachment probe, an economic slowdown or an outright recession hitting in 2020 would be an additional hammer blow.

The self-inflicted damage to manufacturing brought about by the administration’s policies is hitting hardest in states such as Pennsylvania and Wisconsin—swing states that Trump needs to win again in 2020. Farmers across the country have been economically devastated by the loss of overseas markets—especially China, but also Japan—because of the president’s trade policies. Additional trade tensions and job losses threaten red states such as Alabama and South Carolina, home to big European manufacturers threatened by Trump’s tariffs.

“There is a bit of the world economy which is without question in recession,” Tooze said. “The question is whether it generalizes, whether it’s a harbinger of a general slowdown, or, like in 2015-16, it remains more localized.”

This article was updated Oct. 4, 2019.