Recessions happen when presidents overlook key problems

Well, President Trump is at it again—lashing out at commentators who suggest a recession could be coming. He believes that such talk is merely alarmist criticism meant to scuttle his reelection. But the president and his staff have access to the best economic data. And there are clear signs in the data that a slowdown may be on the way.

No doubt, uncertainty about the ongoing trade conflict with China isn’t helping things. Trump has applied tariffs en masse against Chinese imports. While tariffs can assist specific industries when utilized in a targeted, strategic manner, his broad duties on most products from China have backfired. The tariffs are beginning to hurt U.S. consumers, as well as farmers and other exporters.

Even with the tariffs, the U.S. manufacturing sector is slowing. The July manufacturing index from the Institute for Supply Management came in at its lowest level since August 2016.

But there’s more. Despite the Trump tariffs, the U.S. trade deficit is still climbing, particularly with China. The U.S. goods trade deficit reached $875 billion in 2018, an increase of 10 percent in the past year alone. 

Realistically, much of the recent growth in the U.S. economy was fueled by a large cash injection from the December 2017 tax cut along with increased federal spending. The administration’s subsequent, large-scale borrowing has also thrown more loose money into the economy. But these short-term, stimulatory effects are now starting to wash out.

Here’s the real problem, though—and why a recession could be drawing closer. The U.S. dollar has become substantially overvalued, in part due to a slowdown in global credit. This stronger dollar is cutting into U.S. manufacturing competitiveness while also lowering farm prices. It’s a serious burden on America’s productive economy. There are signs that the U.S. economy is cooling, and it’s time to consider concrete steps to prevent a downturn.

As the U.S. dollar keeps climbing, imports become cheaper. And U.S. exports grow more expensive. What’s causing this overvaluation is a continuing inflow of foreign capital into America’s financial markets. This flood of private overseas investment is driving up demand for the dollar. And the resulting appreciation is making it harder for domestic manufacturers to sell their goods abroad or to compete against imports that keep growing cheaper here in the U.S.

The situation has actually gotten worse, though, because Trump’s economic policies have actually helped fuel the dollar’s rise. Increased federal borrowing has attracted even more foreign capital, which further strengthens the dollar. The Federal Reserve reports that the dollar has climbed 25 percent in the past five years. And China has also played its ace in the hole, allowing its currency to fall recently, resulting in an overall 11.4 percent decline since March of 2018, when tariffs were first imposed.

The president’s policies are now backfiring because the dollar’s rise is offsetting the impact of his tariffs. And in the face of this, the Congressional Budget Office foresees a perfect storm: Rising imports will drive America’s current account deficit up from $449 billion in 2017 to more than $700 billion in 2021. Concurrently, the U.S. goods trade deficit is accelerating, and may exceed $1 trillion within the next two years. And that could tip the nation into a new recession.

Trump has made varying comments about the strength of the dollar. But he’s avoided taking action. And that leaves us with a status quo of rising trade deficits, collapsing farm prices, and the fading effects of a 2017 cash injection.

To avert a possible recession, Washington needs to act. Senators Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) have introduced bipartisan legislation that would empower the Federal Reserve to tax foreign purchases of U.S. stocks, bonds, and other assets. That could address the influx of foreign capital investment currently driving the dollar to new heights. And it would gradually lower the U.S. dollar to a competitive, trade-balancing level.

The current trajectory for the U.S. economy is troubling. One way to achieve meaningful action would be to prioritize federal efforts that can restore the competitiveness of America’s productive industries. Lowering the dollar’s value through the recently introduced Senate currency bill offers a promising start.

Robert E. Scott is a senior economist with the Economic Policy Institute Policy Center.