The U.S. economy is buzzing along, but at any time, there could be an event that would signal an end of the expansion, including a blow up in credit markets, a consumer slowdown, or politicization of the Federal Reserve.
Deutsche Bank chief economist Torsten Slok identified five different ways the decade long cycle could end.
1. Credit market bombshell. First a blow-up in credit markets would be a quick catalyst, after years of easy money from the world’s central banks created a global hunt for yield. “Easy money pushed a lot of investors into financial assets and any sudden re-pricing of risks for example in loans, [high-yield], or [investment grade] could have serious negative consequences for the economy,” he wrote.
2. Consumer fatigue. The U.S. consumer is a major part of the U.S. economy, and delinquencies on consumer loans have moved higher for the past two years, as interest rates on credit cards and auto loans have widened. Even though job growth is strong, a slowdown in consumer spending could cause economic growth to “fizzle out.”
3. Trade wars. The U.S. economy would be at risk if the trade war intensifies, with Europe in particular. With growth already slowed, downside risk would be serious for both Europe and the U.S. if there was an escalated or prolonged trade war.
4. Fed damaged. President Donald Trump has criticized the Fed and Fed Chairman Jerome Powell for rate hikes and is now seeking rate cuts. His recent Fed board choices, like Stephen Moore and Herman Cain, have also been seen as political. Cain has removed himself from the process and Moore is still in the running. If investors suddenly see the Fed as politically driven, or if it becomes motivated by the election cycle, “it could trigger a decline in the dollar and introduce serious risk premia in US long-term interest rates.”
5. China current account deficit. Once China has a current account deficit and has to rely on financing from abroad, there would be downside risks to its currency and it would have to sell its FX reserves, meaning U.S. Treasurys. Slok warns that any increase in U.S. long term interest rates from lower demand for Treasurys could be a “potential game stopper for the current expansion.”
Source: Deutsche Bank