Left to right: Seth Carpenter, chief U.S. economist at UBS; Constance Hunter, KPMG chief economist; Joyce Chang, managing director and chair of global research, JPMorgan. Left to right: Seth Carpenter, chief U.S. economist at UBS; Constance Hunter, KPMG chief economist; Joyce Chang, managing director and chair of global research, JPMorgan. (Photo: Jeff Berman/ALM)

The U.S. economy would likely have been continuing to hum right along despite the long growth period we’ve seen if it weren’t for that darn trade war between the U.S. and China, according to economists at JPMorgan, KPMG and UBS.

The U.S. economy is “at this crossroads” now due to the trends that are being seen, coupled with the trade dispute, Constance Hunter, KPMG chief economist, said Wednesday during the Fall Economic Outlook Forum held at New York University’s Stern School of Business.

“For us, the story really is tariffs,” according to Seth Carpenter, chief U.S. economist at UBS, who pointed to the theme of his presentation being those tariffs “take us to the brink of recession.” The U.S. economy has been “strong but for the trade war” for the past year and a half, he says. But he jokingly warned that, at some future point, “that’s going to be like being in the middle of the winter in Michigan and saying that it’s really, really warm except for the frigidity.”

He predicted the U.S. GDP will grow this year to about 2% or more but slow in 2020 to about 1.1%, with growth slowing “very, very sharply” in the first half of the year. UBS expects unemployment will grow over the next year to 4.3%, a percentage that “used to be a good number” when it came to unemployment, he pointed out.

UBS attributed most of the “massive slowdown” in the U.S. economy seen during the fourth quarter of 2018 and first quarter of 2019 to the tariffs, he noted, saying those tariffs took a toll on economic activity and unemployment by disrupting manufacturers’ supply chains.

The unemployment rate, which had been falling for a while, “started to rise” in Q4 2018 and Q1 2019, he said, chalking that at least partially up to the fact that manufacturers often lay workers off when they suspend production while searching for alternative sources for their supplies.

Imports of tariffed goods have tumbled more than 40%, and that fall doesn’t seem to have been fully made up by increased imports from countries outside of China, according to UBS. Although the disruption from tariffs ended in Q2, there was “another wave of tariffs” implemented by the Trump administration after that, and another wave — this time on many finished consumer goods from China — started on Sunday, with more drastic tariff policies scheduled for Q4 this year, Carpenter pointed out. “That is a problem … because this type of disruption is going to happen again and again and again,” and that’s why UBS expects the economy to further slow, he said.

The economy could have continued to grow for “quite a long ways further” if it wasn’t for the trade war “pounding the economy,” he told attendees, who were mostly NYU students.

Tariffs Have ‘Eroded’ Tax Cut Benefits

U.S. and China economic growth will slow in 2020, Joyce Chang, managing director and chair of global research at JPMorgan, predicted. But the two countries are performing better than many other ones, she said, noting “you now have nine economies that are in recession.” Meanwhile, 42% of the global government bond market is “at a negative yield [and] 60% of Europe now has a negative yield,” she said.

Business sentiment is “pushing up recession risk,” according to Chang. Meanwhile, whatever benefit the U.S. manufacturing sector had from the Republican tax reform has been “completely eroded” as a result of the trade war, she said.

The question is now whether U.S. consumer confidence, which has held up so far, will erode as shoppers become more heavily impacted by the tariffs, she said, noting her firm is projecting about a 40%-45% chance of a U.S. recession over the next 12 months. That’s a “higher probability of recession than conventional wisdom,” which is about 27%-30%, she said. There’s over a 50% chance of a recession in the U.S. over the next 2-3 years, she predicted, but said this will likely be “led by an asset class selloff rather than a business cycle event” like the 2008 recession.

An inverted yield curve, like what’s recently been seen, has “always been a bad omen” for the economy, Chang said, but added: “We are in a different point on the yield curve than what we have seen previously.” After all, she pointed out, “Typically the yield curve inversion is a sign that real policy rates have become too high, and that’s certainly not where we’re at today.” It’s been “extreme market nervousness” that’s largely to blame for the recent market volatility, she said.

Like Chang, Hunter pointed out that an inverted yield curve has often been a “potent signal” of a coming recession. Other “essential recession signals” are housing investment, tightness of the labor market, liquidity conditions, current versus future consumer expectations and global conditions, she noted.

One major source of concern is whether the Federal Reserve’s “tools are sufficient at this moment” to have the same impact they had in the 1990s due to “all this ancillary noise around the trade war,” Hunter said.

As far as the U.S. economy is concerned, steady job growth and low inflation are positive factors in play, along with the Fed insurance rate cuts and the pickup in productivity. But Hunter warned that negatives include disinvestment in residential real estate, the trade disturbances, slowing corporate investment, the recessions seen in Europe, the slowdown seen in China and the recent financial market shock.

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