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Will the US Economy Plunge Into a Recession by 2021?
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Will the US Economy Plunge Into a Recession by 2021?

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NEW YORK – February 25, 2019

According to SCMP, roughly half of America’s business economists say they think the US economy will slip into a recession by the end of next year, and three-fourths envision such a downturn beginning by the end of 2021.

The finding comes from the latest survey by the National Association for Business Economics (NABE) of its member economists. Just 10% of them say they foresee a recession beginning this year. At the other extreme, only 11% expect the economy to avoid a recession through 2021.

These alarms, apparently, are fueling the lingering growth of the US economy, which by mid-2019 may be the longest in the entire history of the country. 33% of respondent economists see the reason for such a long climb in the corporate tax reform. Another 27% indicate a steady growth in wages, and 10% are convinced that a period of global economic growth was very helpful in increasing the US GDP (most of the world's major economies showed positive growth in early 2018).

The economy began its expansion in June 2009, when the Great Recession officially ended. If it endures beyond June this year, the expansion will become the longest on record. Compared with others, the current one has been tepid, with annual economic growth averaging just slightly above 2%. But many economists say its modest pace has helped prolong the expansion, in part by keeping inflation in check.

It is obvious to many economists that after such a protracted and, we can say, rapid growth (US GDP shows growth rates above 4%), there will inevitably come a period of recession.

In recent years, the US economy was supported by Trump administration reforms: a reduction in corporate taxes, an increase in tariffs on imported goods, benefits in returning capital, and infrastructure projects.

Such a large stimulus package in such a short time should have a positive impact on the economy. But if the stimulus ends, there may be a serious "withdrawal.”

Despite the high rates of economic growth, inflation in the US is not growing — it barely exceeds 2%. This suggests that US consumers are still inactive.

The reasons are the low wage growth rates and the specific features of the new generation of Millennials, which is beginning to prevail economically in the United States. In particular, this is reflected in the real estate sector, where cooling has already begun — sales have begun to decline, both in the primary and in the secondary market.

There are several alarm signals  which together, under unfavorable circumstances, can cause a snowball effect. And the most talked about risk is, of course, the US-Chinese trade wars, whose consequences for the US economy can be devastating, as well as for the global economy as a whole.

The rise in prices for imported goods (and 25% of the duty on Chinese goods will immediately affect the price tags), will force certain categories of citizens to save, and a decrease in demand will lead to a slowdown in economic growth. We will begin to see the consequences of these steps already in 2019.

At the same time, it is not at all clear how the decline in China, which is already occurring, will affect the US economy.

As to the Fed’s policy, the NABE economists approve of the Federal Reserve’s management of interest rates, with nearly three-quarters of them calling the Fed’s policy making “about right.”

Having raised rates four times last year, the Fed and its chairman, Jerome Powell, have pledged to be “patient” about rates — which most analysts have taken to mean that they’re done raising rates for at least a few months. Investors are collectively betting that the Fed will not raise its benchmark rate at all this year. But the NABE survey found that 39% of economists foresee one rate increase — and 26% say they think the Fed will raise rates twice this year.

In other areas, the NABE survey found:

—The economists were divided on how to address the government’s swollen budget deficits, with about half of them favouring higher taxes and half favouring spending restraints. Among potential tax increases, 50% support a broad-based energy or carbon tax, and 48% support raising individual or corporate taxes.

— On a proposal by Representative Alexandria Ocasio-Cortez to raise the marginal tax rate on the very wealthy to 70%, 42% of respondents to the NABE survey said they thought such a tax would have a net negative effect. By contrast, 17% said they believed it would benefit the economy. An additional 33% of those surveyed said the effect could be negative or positive depending on how the extra tax revenue were used.

— More than 90% of NABE economists said the increased tariffs that the Trump administration has imposed in its trade conflicts with China and other countries will slow economic growth this year. Their estimates range from a subtraction of one-fourth of a percentage point in growth to a reduction of 1 percentage point or more.

With regard to forecasts for the development of the US economy, the opinions of experts are divided. Many analysts do not yet risk calling a specific timing of the recession in the US. They believe that the first half of 2019 will be marked by the growth of the American economy. At the same time, the rate of growth of negative factors for the US economy will depend on the entrepreneurship of their trading partners, and on the stability of Trump's positions.

So far, new duties, currency wars in the world, unwillingness to listen to Trump's position on the energy market, and the willingness of large American enterprises to transport their production to other countries are all factors of pressure on the US economy in the future.

If Trump’s calculations are correct, and everyone will have to make concessions to the US and there will be no recession in either 2019 or 2021. Until then, stability and active demonstration of the stability of the US economic situation will be achieved by systematically tightening the monetary policy.

Rates will be raised, as Trump's policy to reduce taxes increases revenues and, consequently, inflation. In addition, there is a growing shortage of foreign trade due to the growth in domestic demand. And the increase in customs duties entails a rise in prices.

At the same time, the rate of growth of negative factors for the US economy will depend on the enterprise of their trading partners, and on the stability of Trump's position.

In order to avoid the concern of the global investment community until 2020–2021, the head of the Fed will maintain the mood in the financial arena about his willingness to maintain a given pace. Everything can change only if the internal political situation in the country deteriorates.

If Trump does not hold his position within the country, and his trading partners do not even try to give up, the president’s attempt to “make America great again” will fail, and the US will get a recession. In such a scenario, a recession in the US will inevitably affect the entire global economy.

Author: USA Really