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Escalating Trade Tensions Puts U.S. on Brink of Recession

The economy goes in cycles—expansion (growth), peak, and contraction (recession). It always has and always will. That doesn’t mean global economies don’t try and do everything possible to prevent a recession. Unfortunately, trade tensions between the U.S. and China, the two biggest economies, seems to be sending the U.S. and global economy to the brink of a recession. The U.S. implemented a new round of tariffs on September 1 with no signs of slowing down. While President Trump has said tariffs won’t hurt the U.S. economy (and are easy to win), it now appears as though the three factors that drive the U.S. are stalling, and the U.S. could enter a recession within the next 12 months.

The U.S. is the world’s biggest economy, if it goes into a recession, it hurts the entire global economy, especially Canada’s, since they are our largest trading partner.

What are the three factors? Government, business, and consumer spending. Because of the trade war, businesses have pulled back and business executives are becoming increasingly pessimistic. In early 2018, 79% of businesses executives were optimistic about the U.S. economy; today, that number stands at 42%—the lowest level in three years.1

While the U.S. government continues to spend freely and the deficit is at record levels, the way it spends isn’t expected to change much now that President Trump has signed a two-year budget deal into law.2

That means U.S. consumers will have to prop up the U.S. economy. Whether they can afford to or not is another question. U.S. consumer spending makes up slightly more than 70% of U.S. economic activity. And Americans spend based on where they think the economy is headed. If U.S. consumer sentiment is strong, they won’t put off buying a new car, furniture, electronics, or smart refrigerator. If it’s weak, spending slows, and along with it, the U.S. and global economy.

That’s a lot of responsibility for the consumer to shoulder.

One of the most reliable measures, The University of Michigan Consumer Sentiment Index, is flashing a warning. According to the survey, U.S. consumer sentiment is at its lowest level in three years and fell by the most since December 2012.3

Why? The fall in U.S. consumer sentiment is tied directly to U.S./China trade war. One in three of those surveyed cited the trade war. Other risks curbing consumer sentiment include higher inflation expectations, expected rising unemployment, and slowing wage gains.

Higher prices because of the trade war coupled with increased personal debt and less disposable income could translate into slower consumption and economic growth.

The effects of which could be seen as early as the second half of 2019. Most Americans also believe stocks will begin to fall in 2020; an all-important election year.

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On the surface, the U.S. economy looks solid, unemployment is low, and the economy continues to chug along. But the fact is, the U.S/China trade war is having a detrimental effect on the U.S. economy. And the three factors needed to sustain economic growth are pointing to a recession. Fortunately, the trading experts at Learn-To-Trade.com can show investors proven trading strategies that can help them profit no matter what the economy or stock market is doing.

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Sources:

  1. “Business Executives Take Sharply Dimmer View of U.S. Economy, AICPA Survey Finds,” American Institute of CPAs, September 5, 2019; https://www.businesswire.com/news/home/20190905005465/en/Business-Executives-Sharply-Dimmer-View-U.S.-Economy.
  2. Fabian, J. “Trump signs two-year budget deal,” The Hill, August 2, 2019; https://thehill.com/homenews/administration/455947-trump-signs-two-year-budget-deal.
  3. “U-M Surveys of Consumers: Tariffs weaken confidence,” University of Michigan, August 30, 2019; https://news.umich.edu/u-m-surveys-of-consumers-tariffs-weaken-confidence/.

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