Economy Flashing Warning Lights

Global trade tensions, rising interest rates, cumulative debt, administrative neglect

US President Donald Trump is likely headed for growing economic problems both domestically and overseas that his government, lacking any real expertise in dealing with them, appears to be ignoring. Some of those problems are caused by his own decision to restrict trade, according to a growing number of economic reports from overseas.

Despite the President’s boast during the US Thanksgiving holiday that the US economy is performing better than it ever has, it isn’t. It is beginning to resemble a troubled jetliner, cruising at the usual 11,000 meters, when all the lights on the pilot’s console begin to flash yellow. Meanwhile back in first class, the flight attendants are still pouring the Dom.

Earlier this week, the administration was brought up short by an announcement from General Motors, the country’s biggest car company, that it would cut 14,000 jobs in coming months. That followed a similar statement by Ford, which said in October that it was cutting an unspecified number of jobs and restructuring. Both, along with other major industries, say they are being whipsawed by the President’s imposition of tariffs, which are raising the price of inputs. The world’s most successful tech stocks are all flashing yellow.

Those announcements don’t necessarily presage a sudden and deep downturn. But with the President staking so much rhetorical political capital on what he believes will continue to be a surging economy, he is likely to face growing criticism from his political foes.

For instance a new report, issued last week, by the 32-country Organization for Economic Cooperation and Development, described the global economy as “navigating rough seas.” While global GDP growth remains strong, according to the report, growth has peaked, masked by strong employment and growing labor shortages. While President Trump said inflation remains tame and criticized the US Federal Reserve for its continuing incremental interest rate increases, “global trade and investment have been slowing on the back of increases in bilateral tariffs while many emerging market economies are experiencing capital outflows and a weakening of their currencies,” the OECD report said.

The report does say the slowdown probably will amount to a soft landing, with global GDP growth projected to slow from 3.7 percent in 2018 to 3.5 percent in 2019-20, “downside risks abound and policy makers will have to steer their economies carefully towards sustainable, albeit slower, GDP growth.”

And his decision to upend the 70-year-old trade regime that the US put in place at the end of World War II seems almost guaranteed to spell additional uncertainty. Indeed, on Nov. 26, the World Trade Organization, in its latest World Trade Outlook Indicator, predicted further loss of momentum in trade growth into the fourth quarter of 2018, with the outlook indicator dipping to its lowest level since October 2016 and reflecting decline sin all component indices.

The export orders index has steadily declined and is approaching its weakest point since 2012, with indices for automobile production and sales (96.9) – see Ford and General Motors – electronic components (93.9), and agricultural raw materials (97.2) all moving to below trend. International air freight (100.0) and container port throughput (101.2) have dipped but remain on trend, according to the report

The results, according to the report, “are consistent with the WTO's downgraded outlook for global trade issued in September amid escalating trade tensions and tighter credit conditions in important markets. The revised forecast anticipated trade expansion to slow to 3.9 percent in 2018 and 3.7 percent in 2019 from 4.7 percent in 2017.

Rising interest rates mean trouble, particularly for US consumers, as well as raising the cost of borrowing across the globe and causing flight of capital from emerging economies and markets into treasuries. Debt on all levels – including the US government’s, is scary. As Asia Sentinel reported recently, a stunning 35 percent of US families are six months behind in paying their monthly bills and have been visited by debt collectors, who collect anywhere between 15 and 35 percent of what they can recoup. And they are running more into debt.

Average credit card debt per U.S. household was $8,431 in September, a total of US$1.041 trillion shared by 123 million US households. According to the Institute for Policy Studies, one in five US households – more than 29 percent – have zero or negative net worth. “Underwater households,” according to the report, “make up an even higher share of households of color. Over 30 percent of black households and 27 percent of Latino households have zero or negative net worth to fall back on.”

“Subprime borrowers” – the same people who sank the US housing market in 2008 – are US$282 billion in debt for car loans and having serious trouble paying the money back, according to data from the New York Fed.

Real estate owned by individuals in the United States is valued at US$24 trillion, with mortgages reaching US$9.9 trillion. This means that Americans have $13.9 trillion in homeowners’ equity. This is the highest value of home equity Americans have ever experienced. It also means that the Fed’s steady tightening, which has now reached 2.25 percent, is raising the monthly payment both homeowners and credit-card holders face, and the Fed appears determined to keep on tightening if inflation continues to creep up.

A report from the Wisconsin HOPE Lab finds many more community-college students are homeless or lack food than previously reported. Around two-thirds of community college students are “food insecure,” meaning they have limited or uncertain access to nutritionally adequate and safe foods. Around half of these students are also “housing insecure,” meaning they are forced to move often or cannot afford rent or utilities. Some 14 percent are homeless.

Student loan debt, also tied to interest rates, is also on the way up Americans owe more than US$1.48 trillion in student loan debt, spread out among about 44 million borrowers – US$620 billion more than total US credit card debt. In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up 6 percent from 2015.

As the OECD report notes, “An accumulation of risks could create the conditions for a harder-than-expected landing. First, further trade tensions would take a toll on trade and GDP growth, generating even more uncertainty for business plans and investment. Second, tightening financial conditions could accelerate capital outflows from emerging market economies and depress demand further. Third, a sharp slowdown in China would hit emerging market economies, but also advanced economies if the demand shock in China triggered a significant decline in global equity prices and higher global risk premia.”

Political tensions other than trade have also grown, as the OECD points out, in the Middle East and Venezuela, where “geopolitical and political challenges have translated into more volatile oil prices. In Europe, Brexit is an important source of political uncertainty. It is imperative that the European Union and the United Kingdom manage to strike a deal that maintains the closest possible relationship between the parties. In some euro area countries, the exposure of banks to their government debt could weigh on credit growth if risk premia were to increase further, with dampening effects on consumption, investment, GDP growth, and ultimately jobs.”

It’s difficult to say how far off this growing storm is, and how long it will take to appear. But given all the domestic and international signals, it might be wise to tighten the hatches.