Contingency: why the US is expected to have an economic downturn by the summer of 2020

Most financial directors of leading companies in the world predict an economic downturn in the US in the summer of 2020. This is evidenced by the results of the study "Prospects for global business" of the American University Duke.

Among the 1,500 financial directors surveyed, 67% expect a recession in the United States by the third quarter of 2020. At the same time, 38% do not exclude the beginning of an economic downturn at the beginning of the next year.

“Most CFOs are confident that the United States will face a recession in about 16 months. Although its start date turned out to be a bit later than we were told in the last quarter, there is a common opinion that the recession is approaching, ”says Professor of Finance, Duke University and research leader John Graham.

According to analysts polled by RT, US statistics show the end of the business cycle in the United States economy. Traditionally, this situation is accompanied by a slowdown in economic growth, an increase in unemployment and a downturn in business activity.

Even in the second quarter of 2018, US GDP growth reached its maximum over the past few years and amounted to 4.2%, but after that the figure began to decline and already in the fourth quarter fell to 2.2%. Such data are provided by the Bureau of Economic Analysis (BEA) of the US Department of Commerce.

According to the ministry, simultaneously with the slowdown in economic growth in the United States, unemployment began to grow gradually. In October 2018, this figure dropped to a minimum in almost 50 years and amounted to 3.7%, but in January 2019, the indicator rose to 4%, and today it remains near 3.8%.

The US business activity index (PMI) in industry and services also follows a general trend to slow down the economy. According to preliminary data from the analytical agency IHS Markit, in April it fell to the level of 52.8 points. The value was the lowest since September 2016.

“Although the overall growth rates of the economy and job creation remain relatively high, the slowdown is likely to continue. The company's expectations regarding future growth have dropped to one of the lowest levels since research since 2012, ”predicts IHS Markit, chief business economist, Chris Williamson.

As Dmitry Inogorodsky, an expert at the International Financial Center, told RT in an interview, one of the reasons for concern about the impending recession in the United States was the recent circumstances in the country's public debt market. At the end of March, the yield on US government bonds with a maturity of ten years was lower than that of government bonds with a maturity of three months.

This situation is traditionally formed before the onset of the crisis and was last observed in 2007.

Previously, economists from the American research firm Bianco Research traced the relationship between the difference in yields of US government bonds and all cases of a recession in the United States over the past 50 years. As the agency experts predicted on the basis of their research, before the start of a new recession, the US economy may remain less than 300 days.

Loss of control

A number of experts believe that in the situation with the yield of Amrikan government securities the US Federal Reserve is to blame - an analogue of the country's central bank.

In 2018, the Fed raised the base rate four times (to 2.25-2.50% per annum) and planned to raise two more in December, the 2019th. However, already in January, the Fed has noticeably changed its tone, and in March, top managers decided to keep the rate until the end of the year. As the chief strategist of UNIVER Capital, Dmitry Alexandrov, explained in a conversation with RT, a dramatic change in the Fed's policy may be a consequence of serious problems in the US economy.

The global financial crisis of 2008 forced the Fed to ease monetary policy and lower the interest rate to a record low - from 0 to 0.25% per annum. Such a measure was taken to stimulate economic growth during a recession: loans became cheaper, and the level of consumption and investment began to grow.

The American central bank took the rate of raising interest rates only from December 2015. This policy tightening is adopted to protect the economy from overheating. Rising interest rates increase the cost of borrowing for American business and somewhat weakens overall economic activity in the country.

Meanwhile, signs of a new economic slowdown forced the Fed to stop tightening monetary policy. Now, amid fears of a new recession, experts do not rule out another change in the course of the Fed towards lower rates.

It is curious that the desire of the Fed to protect the economy from overheating by raising rates partially weakened the effect of the tax reform of Donald Trump. Peter Pushkaryov, chief analyst at TeleTrade, told about this in an interview with RT. At the end of 2017, the head of the White House signed a law on the reduction of income tax for American companies from 35% to 21%. As expected, this measure was supposed to be one of the drivers of economic growth.

As a result, Donald Trump has repeatedly criticized the Fed for raising rates too fast. According to the expert on international markets, BCS Broker, Oksana Kholodenko, although the US central bank no longer tightens its policy, the tax reform has already ceased to support the growth of the country's GDP. Moreover, the United States has no opportunity to stimulate the economy at the expense of new tax breaks for business.

“In 2015, the Fed began the process of curbing monetary incentives. Meanwhile, the effect of tax reform has begun to dry up, and new large-scale fiscal incentives are not expected due to the growing state debt of the United States and the political split in the country, ”said Holodenko.

Call of Duty

The volume of public debt of the United States is a record $ 22.2 trillion. Such data leads the official portal Usdebtclock.org.

According to Peter Pushkarev, at the same time with the risks of a new economic recession, the greatest threat to the United States is represented by a possible debt system crisis. Recently, states have been gradually reducing the volume of new investments in state bonds of the United States, while servicing the public debt has become more and more difficult for the country.

“Many investors do not want to invest more in US national debt, because they already have too much money in this“ pocket ”, and it is becoming more and more difficult for the States to pay interest on debt without resorting to a“ printing press ”. It is these problems that the financial elite are probably trying to disguise and prefer to talk more about recession, ”explained Pushkarev.

According to the analyst’s forecast, the current situation, along with the gradual withdrawal of Europe and Asia from dollar settlement, may lead to a decrease in the US currency rate by 10-15%, which will further reduce the demand for US Treasuries.