The notion of a US recession seemed remote just a few months ago, a mere blip on the radar of economic possibilities. More recently, however, that picture has started to change. A downturn, while still a risk scenario, is no longer unthinkable. A confluence of factors, from policy uncertainties to fragile financial markets, is casting a shadow over the world’s largest economy.
Several key financial indicators are already flashing yellow. The yield on 10-year Treasury bonds has fallen about 70 basis points in recent weeks, while oil prices have slipped below $70 a barrel. These moves coincide with a string of disappointing economic data releases, reflecting growing apprehension about the immediate consequences of President Donald Trump’s trade policies and public sector reforms. Indeed, judging from recent surveys, policy uncertainties have already dampened business and household confidence, clouding the economic outlook. This spreading weakness is manifesting itself in three distinct stages.
First, lower-income households have been struggling, burdened by dwindling savings, maxed-out credit cards and mounting debt. Second, the corporate sector is now adopting more of a wait-and-see approach, faced with a barrage of policy pronouncements and an increasingly unpredictable environment. Third, the threat of a tit-for-tat tariff war has become much more of a reality this week, with the potential to disrupt global supply chains and stifle economic growth.
Adding to the unease, inflation, which had shown signs of abating, is proving more stubborn than anticipated. This whiff of stagflation — that troublesome combination of stagnant growth and rapidly rising prices — raises the specter of another policy misstep by the Federal Reserve. The central bank faces a delicate balancing act as it’s caught between the requirements of its dual mandate to maximize employment and deliver price stability.
