TheEconomistNovember 2nd 2019 231T
his wasnot the way it was supposed to
go. “Four, five and maybe even six per-
cent” growth was what President Donald
Trump promised in December 2017. Even
within the relatively sober pages of the
budget proposal released by the adminis-
tration in March this year, Mr Trump’s team
forecast economic growth rates of 3% or
more right through to 2024—which would
be the last full year of a second Trump term,
were one to occur. Instead, the American
economy, which just missed the 3% growth
target in 2018 despite the boost from the
president’s budget-busting tax bill, contin-
ues to lose steam. In the third quarter of
this year gdp, adjusted for inflation, rose at
an annualised rate of 1.9%, down from 2%
in the previous three months. The question
hanging over Mr Trump, and millions of
American workers, is just how far the slow-
down will run and how deep it will go.
The first signs of trouble for America’s
economy appeared in late 2018. Housing
construction slumped as higher mortgage
rates (pushed upward by Federal Reserve
interest-rate hikes) combined with rising
home prices to drive buyers from the mar-
ket. At the same time, a global slowdown in
manufacturing and trade weighed on
American producers. New manufacturing
orders dropped fairly steadily from Sep-
tember 2018 until May this year, and parts
of America’s manufacturing heartland ex-
perienced declines in factory employment.
Economy-watchers have waited anxiously
in the months since to see whether weak-
ness in industry and construction would
bleed into the service sector, where most
Americans work.
Mounting anxiety eventually roused
the Fed to action. The central bank spent
most of 2018 raising its benchmark interest
rates in order to keep inflation in check, de-
spite some withering criticism emanating
from the president’s Twitter account. As
the world economy sputtered, the Fed
slowly changed course: first halting its cy-
cle of increasing rates, then cutting them
by 0.25% in both July and September this
year. Jerome Powell, the Fed’s chairman,
insisted that the moves represented a
“mid-cycle adjustment”, lest markets read
the cuts as a sign that the end of America’s
longest expansion on record was nigh.The cuts appear to have helped. Mort-
gage rates have retreated; the average rate
on 30-year loans, which rose to nearly 5% a
year ago, has dropped back to 3.75%. That
has put a bit of wind back in the sails of the
residential construction industry, which
began work on about 20,000 more homes
in September than in the same month last
year. Residential investment contributed
positively to gdpgrowth in the third quar-
ter, the first time it had done so in nearly
two years.
Rate cuts also seem to have switched off
the bright, blinking recession-warning
light which is the “yield curve”. “Inver-
sions” of the yield curve, which occur when
rates on long-term government bonds fall
below those on short-term government
debt, frequently appear a year or so before
the onset of recession. The curve inverted
over the summer, fuelling recession wor-
ries, but has since flipped back. Stock
prices, which looked sickly in May, have
roared back to touch record highs, buoyed
by better-than-expected earnings reports
as well as the prospect of a trade truce be-
tween America and China.
On October 30th the Fed reduced its
benchmark rate once more, by another
0.25%. But in doing so it very nearly de-
clared victory in the battle to ward off a
downturn. Markets now expect the Fed to
hold its ground for at least the next six
months. Mr Powell, while emphasising
that the Fed will be watching the data close-
ly, said, “We see the current stance of mon-
etary policy as likely to remain appropri-The economy
Easy now
WASHINGTON, DC
America’s economy is resisting the pull of recession
United States
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