Over the past few months the world economy has started to slow down as Donald Trump continues the “trade war” with China. The signs of economic recession have reared their heads as of August 15th when the interest return rates on 10-year government bonds dropped below the interest return rate of the 2-year bonds. According to Tom Essaye, writer at the Sevens Report, “…at this point currency and bond markets are no longer flashing ‘caution’ signs on the U.S.-global economy and risk assets, they are flashing a ‘warning’ sign -loudly.” Another economist Jeffrey Gundlach states that there is a 75% chance of a recession before the 2020 election (via Bloomberg Opinion).
Day traders are hoping that the U.S. trade war with China will hit a standstill soon due to signs of the economy growth is slowing rapidly. According to Bloomberg Business’ Robert Burgess President Trump should not “imperil his chance at reelection by dragging out the trade conflict with China.” The Fed has concluded that the rise of these trade conflicts has led to a decline of .8% GDP in the first 6 months of 2019 alone. The news of impending economic recession may not come as a surprise to many as it has already been 10 years since the Great Recession of the late 2000’s. Typically the economy tends to operate on a 10-year cycle. Economic expansions tend to last 5 years whereas the economic contraction tends to last the same amount of time.
However, there is a chance that the economy is not hit by a recession but rather more of a slowdown. The economy may continue to grow at a much slower rate than previously. A slowdown. A slowdown may lead to negative growth in some areas; however, the majority of people would experience growth in income as well as less poverty. An economic slowdown may lead to a slightly higher growth in unemployment, but not as much as an economic recession would.
An economic recession leads to a higher unemployment than the natural rates. Earlier in 2019, the unemployment in America has hit a 50-year low of 3.8%. Most companies will wait until full on economic recession to lay workers off, because hiring and training workers is expensive. If the economy were to go into recession you could expect the unemployment rate in America to rise.
So, what does this mean for us? Well, this news should really affect how we vote for the upcoming election. Some of the presidential candidates are indicating implanting new government programs, such as a mandatory government buyback program, or perhaps free college. However according to the Federal Reserve Bank’s discretionary fiscal policy, taxes should be reduced during recession to give the consumers extra money to continue to buy items. Whereas the expansion of government programs would lead to extra taxation or an increase in national debt. The upcoming election will be key to the economic policy of the next 4 years.
For many the idea of recession may be scary, because they may remember the Great Recession of 2007. However, that time we were completely blindsided whereas this time we are completely prepared.