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Could a 2018 Recession Derail Trump’s Re-Election?

Posted On March 29, 2018 1:31 pm
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Economic observers admit they don’t have a great track record predicting downturns. Forecasting a 2018 recession is a “mug’s game,” given all the uncertainties involved, said Krishna Guha, vice chairman at Evercore ISI in Washington.

But what seems clear is this: The fiscal sugar rush that’s ginning up growth in the short run could be setting the stage for a letdown later, especially if the Federal Reserve feels compelled to take away the punch bowl before inflation and asset prices like stocks get too out of hand.

The trouble is that some of that fuel — the $300 billion boost to government expenditures — is slated to burn off after two years under the budget agreement passed by Congress. That’s led some economists to talk of a fiscal cliff in 2020, with falling outlays dragging down the economy.

The betting, though, is that lawmakers will act to prevent that. But even if they do, they’re unlikely to throw more accelerant on the economy. So the budgetary boost to growth will shrink from a half percentage point this year to a quarter point next year to basically a wash in 2020, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

In the meantime, the super-charged spending raises the risk of overheating the economy by pushing unemployment further below its long-run sustainable level and leading, at last, to a pick-up in wages and inflation. And that, in turn, increases the chances that the Fed will overreact by jacking up interest rates, tipping the U.S. into recession.

The prospect of a “train wreck” in 2020 is palpable, as Fed efforts to prevent overheating may lead to rates that are too high for an economy suffering from the end of the fiscal sugar rush, plus an ebbing of global growth.

One potential warning flag: stock and other asset prices remain elevated even after last week’s selloff. As Powell himself has noted, it wasn’t faster inflation that led to the last two recessions. It was a bursting of asset bubbles.

Spurred by rising equity and property prices, household net worth as a percentage of disposable personal income has topped the highs seen before the past two economic downturns.

If the stock market continues lower, this could set off a self-fulfilling downward spiral, sending the economy into a recession.

 Related: Does Volatility Predict Recessions? The Truth Will Surprise You. 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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