US Economy Showing Signs Of Stress

The economic recovery will be 10 years old next month, making it the longest economic expansion in US history. Of course, this slow but steady expansion is coming off the greatest financial decline in US history, by some measures even greater than the Great Depression. But it also begs the question of how much longer this expansion can run.

For the first time in nearly two decades, rates on US government debt are higher than other developed countries. The last time this situation occurred was in June, 2000. The yield on the benchmark 10-year bond has moved up to 3.1%, increasing borrowing costs across the economy. This rise in rates actually reflects two conflicting trends, optimism about the short-term future of the economy compared to the resto of the world and rising inflation expectations, partially driven by the explosion of the deficit prompted by the Trump tax cuts.

In fact, the Fed will intends to raise rates at least two more times this year, with a 50-50 chance of a third hike, which will further push up yields and borrowing costs, adding to the chances that the economy will slow. In addition, higher inflation erodes any wage gains workers might receive. Last month, inflation adjusted wage gains were basically flat and have actually been falling since 2015.

The rise in rates is also driving a stronger dollar which will actually make imports cheaper and exports more expensive. That will hurt the agricultural and manufacturing sectors, while possibly providing lower prices for consumers over all. And it will also drive up our trade deficits, driving Trump, who is fixated on them, into even more self-destructive trade policies, such as the auto tariffs currently being floated.

However, those lower prices will probably be offset by higher gas prices. For the bottom 40% of Americans, rising gas prices will have eliminated any of the gains from the Trump tax cut this year. For the bottom half of that 40% group, higher gas prices will have consumed over three times more than they received from that tax cut.

Another additional data point, (h/t to Matt Yglesias on this one), comes from the recently reported decline in US fertility rates. As sociologist Philip Cohen notes, "That drop in 2017 is the biggest since the last recession started. In fact, we have seen no drop that big that’s not associated with a time of national economic distress, at least since the Baby Boom". Other studies have shown that a large decline in fertility is actually a leading economic indicator. Cohen summarizes, "This is a pretty solid warning sign, although not definitive, of an economic downturn coming in the next year or so".

These economic statistics show that the economy is moving out of the low growth, low interest rate environment that has dominated for the last decade. If that movement is actually reflective of a economic downturn, that could spell real danger for Trump and the Republicans, maybe not for this fall's election but for the leadup to 2020.