The United States' Endless End of Cycle

Nevertheless, beyond the serious uncertainties regarding world trade, the slowdown in the American domestic demand is inevitable. The 2018 budget provided a budgetary stimulus approximating 1.2% of GDP according to the OECD, which largely explains the acceleration in growth from 2.2% in 2017 to almost 3% in 2018. Yet the miracles of fiscal multipliers, which so many grandstanding politicians dream of, are short-lived. Once the money is spent, growth returns to its trend, which doesn’t exceed 2% in the case of the United States, or even goes below it. We should thus not expect America to drive global growth in 2019. From this point of view, the OECD forecasts (2.7%) are very optimistic.
 
Yet there is a thin line between slowdown and recession. Economists sometimes refer to the aeronautical concept of stall speed: below a certain growth rate, the economy would be so vulnerable to any unexpected shock that it would easily slip into recession. However, comparisons do not always involve necessary truths, and I have too often heard that the American economy was dangerously close to this hypothetical critical speed. The arguments in favor of recessive risk have stronger foundations. For instance, Carmen Reinhart emphasizes the strong growth in debt issued by risky companies (in both directions) since 2013, and particularly leveraged loans and their derivatives (CLOs). Others point out that fewer buyers are willing to purchase riskier, below investment grade bonds, and that the latter’s price is falling dangerously, or, if you will, that the associated borrowing rates are rising just as dangerously

Other analysts argue that the flattening of the yield curve - the difference between long- and short-term bond yields - is a clear sign of recession, as shown by Stock and Watson in 1992. In fact, the gap between 2- and 10-year yields has almost disappeared in recent months. But the work of economists such as Michael Woodford from Columbia University has demonstrated that the Federal Reserve's holding of federal bonds following its purchasing program ($2,220 million in January 2019, or 10% of the outstanding amount) has reduced their yield by approximately one percentage point. In fact, this was the very purpose of "quantitative easing". The yield curve is therefore strongly distorted by the Fed's past policy, and has thus lost its predictive power.

Moreover, the negative impact of international trade barriers, which are subject to the interests of the "America first" policy, can only worsen over time, including through the inflationary effect it has in the United States. The Federal Reserve Bank of New York estimated that the rise in import tariffs had already added a third of a percentage point to inflation. Finally, it is highly unlikely that the equity markets will welcome the fact that monetary tightening has been suspended with a new surge - we can at best hope for less volatility. Hence, the positive wealth effect that has supported consumption so far will soon become history.
 
In an ideal world, politicians would take advantage of the temporary relief to address the economy’s structural weaknesses, in particular the insufficient qualification of the workforce, faced with the digital revolution and the pervasion of artificial intelligence in companies, and thus the deficiencies of the American education system. Even if the new Democrat-controlled Congress intended to do so, this will probably not be the President’s priority. It is therefore more relevant to worry about the weakness of the US economy in the next cycle, which would be bad news for the global economy, than about the end of a cycle announced too early