October 31, 2018 Patrick Oliver-Kelley

Trump will have a glowing economy to brag about for at least a few more months, but signs of a slowdown ahead are gathering steam. Stocks have vacillated and are barely even since January and looks worse. Traders worry if the market is accurately pricing in the impact of Trump’s trade war with china and his insulting every US trading parent in the world. How much longer can this nine-and-half-year-old bull market last? The answer started last week.

Retail sales slowed recently, prompting forecast be lowered from 5% to 4.7%. The housing market is slowing due to rising mortgage expense and all-time high prices for new homes and existing home sales have fallen to a two-year low. Wages grew 3.3% in the third quarter, beating the cost of inflation and proof that the super-hot jobs market is growing paychecks.

A recession is not imminent, but one is increasingly likely, as the stimulus of tax cuts, federal spending hikes wear off, and soaring federal deficits take a toll on debt markets. Trump suggests the US can outlast China in a war of attrition, as his protectionist trade policies cut growth on both sides of the world, testing how much economic pain politicians can impose on their own people. But if his calculation truly favors the US.

China and its leaders do not seem to have noticed. They have made no concessions to Trump and seem content to wait and see who blinks first. The biggest risk is that neither blinks.

The world economy’s problem in 2018 is one of uneven momentum. Trump’s tax cuts have lifted quarterly growth, and unemployment is the lowest since 1969 in the US. Yet the IMF thinks growth will slow for all advanced economies. The dollar is strengthening making it harder for emerging markets to repay their dollar debts. The fear is that those problems will wash back onto our shores. The rich world is ill-prepared for even for a mild recession- the policy arsenal is depleted. Today the Fed’s tool of lowering rates is cut in half. The Euro-area even less and Japan has no room at all.

Timely action could avert some of the danger. Raising inflation targets would be a good first move. But pre-emptive action calls for initiative from politicians which is conspicuously absent.

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