Risk of recession appears low, but concerns remain

A number of trends have developed in recent weeks that could potentially affect the U.S. economy in a negative way. The most widely reported include a sharp decline in the stock market, the yield curve inverted for some maturities and the intensified uncertainty that hangs over America's foreign-trade activities.

These trends are emerging against a backdrop of an economic expansion that is the longest, but also one of the least robust, that we have ever experienced. So it is not surprising that I find myself engaged in a crescendo of discussions pertaining to whether an economic recession is imminent.

Before I offer my own opinion, I will report that the results of the June survey of the National Association of Business Economists indicate only 15 percent of its members expect a recession to start in 2019, but that number climbs to 60 percent who expect a recession by the end of 2020.

According to their latest report, "Increased trade protectionism is considered the primary downside risk to growth by a majority of respondents, followed by financial market strains and a global growth slowdown."

As for how this will affect the North American plastics industry, I start with the premise that a disruption to global trade activity will have the greatest impact on the materials and machinery sectors. The recent news of tariffs on Mexican imports could potentially affect a significant number of processors as well, but it is still too early to assess the impact or probability of this particular risk. Overall, the net effect on all sectors of the plastics industry will be negative if the U.S. economy enters a recession.

While President Trump said June 7 that his administration would not impose tarifffs on Mexican-made goods immediately, on June 10 he also warned that tariffs could still come into play if officials in Mexico do not sign up to unspecified elements of an agreement related to the flow of migrants from Central America.

But while the risks to the outlook have increased in recent weeks to the downside, the current health of the U.S. economy is still quite good. As best I can tell, all the threats to the current economic expansion are self-imposed. And these threats are the results of choices made by a small number of politically motivated people. This does not mean the risks are not big, because they most certainly are. It does mean that these risks can change, and even dissipate, very quickly.

These highly visible risks notwithstanding, it is important to remember that the fundamentals of the U.S. economy are driven by a large number of nonpolitically motivated people, namely consumers. And the latest available reports on the health of the consumer remain quite encouraging.

According to data from the Bureau of Economic Analysis, personal income growth has been solid for the past few quarters. I have taken the monthly BEA data and created a rate of change chart that measures the 12-month growth rate for nominal personal income. The curve indicates that incomes have been growing steadily at a rate in excess of 4 percent for the past year and a half.

Employee paychecks account for most of total personal income, and growth in wages has been rising due to the strong labor market. This trend will continue for at least several more months.

And when Americans have money, they spend it. I have included on the chart the 12-month rate of change curve calculated from the BEA's monthly data for inflation-adjusted personal spending. This curve is indicative of a consumer sector that is quite healthy, as real spending growth has exceeded an annualized rate of 4 percent for the past two years.

As far as the consumer sector goes, this is about as good as it gets. There have been times in the past when consumer spending was faster, but these times also corresponded with an accelerating rate of inflation. The fact that the real rate of growth in consumer spending has hovered right around 4 percent per year for the past 10 years, while at the same time the rate of inflation has stayed below 2 percent, is a situation worth preserving as long as possible in my opinion.

I am sure it will not last forever, but it does not appear that it will end in the next few quarters. And since consumer spending accounts for more than two-thirds of the total U.S. GDP, I am sticking with my forecast of 2 percent growth in the overall U.S. economy for both 2019 and 2020.

This economic forecast does not mean I am at all confident in the near-term decisions of the world's policymakers. However, I do believe that even if the U.S. economy does slip into a recession in the second half of 2020 (an outcome I am not at all ready to concede at this time), I believe it will be shallow and short by historical standards. The global trade tensions notwithstanding, there are no apparent bubbles, imbalances or other signs of overheating in the U.S. economy at this time that could cause a severe recession.

I conclude by saying I strongly believe the Chinese government needs a stern and meaningful global rebuke when it comes to global trade abuses. Something monumental, on the order of what Reagan achieved with the former Soviet Union, would be hugely beneficial in the longterm to all concerned, including China. I remain hopeful this will be the outcome. I also hold fast to the knowledge that political opinions about the economy change faster than actual economic fundamentals do, and I cannot totally disregard these opinions in my forecasts.