Undoubtably, you’ve seen the recession headlines in recent months and I’m sure you’re asking if the warnings are credible or not.
The simple answer: it depends. The US economy is driven by three factors: Government spending, business spending and consumer spending. Of these, consumer spending exerts the most influence.
Consumer spending itself is a function of employment, discretionary income, sentiment and credit utilization. If consumers are employed (unemployment is around 3.5% so, check yes), they have income to pay their bills. If they receive pay raises (not much progress on this one), they have extra discretionary income for non-essential spending (clothes, cars, vacations). If they are confident in their job and income stability (positive sentiment), they are more willing to obligate their future and borrow money to finance very large purchases.
Tariff and trade war headlines dented consumer sentiment this summer. When the next data point is released, impeachment talks won’t help. If these two issues persist, recession concerns may very well become reality.
Chinese leaders are meeting with US officials in October for another round of trade negotiations. Most of our news outlets offer a skewed view of these negotiations because of the media’s hatred for President Trump. The economic reality in China is that their economy is slowing dramatically and this is putting pressure on leaders to do something. Pork prices skyrocketed after an African virus wiped out 1/3 of China’s massive pig herd. Pork is the primary protein in the Chinese diet so this price spike is hitting every dinner table in the country. Protests in Hong Kong are creating instability and economic uncertainty. It looks like waiting for the next presidential election will be a high-risk and potentially costly strategy.
If the two sides come to an agreement in October, that could flip the recession script 180 degrees. The global economy could snap from the economic doldrums back to life. This flip would happen when global interest rates are ridiculously low. This in turn, would help convince borrowers commit their future to their local banker.
We don’t like to be reactionary in our investment decisions but the unpredictable nature of “Trump vs China” requires a patient wait-and-see approach.