Five things that could end this phase of American economic expansion

It is quite plausible that under Donald Trump’s administration the US will indeed complete its longest ever period of uninterrupted growth. But the president’s actions could also push the country into a recession

When will the American economic expansion end? We all know that there is a business cycle and it is just at the moment when politicians believe that growth will go on forever that you should head for the hills. Gordon Brown repeatedly boasted that he had abolished boom and bust, including in his 2006 budget two years before the downturn hit. Donald Trump boasted at Davos this year that: “Protection will lead to great prosperity and strength.” Will that be two years before the US downturn?

Schroders chief economist Keith Wade has just written a paper noting: “If the US economy continues to grow through April, the current expansion from trough to peak will match the second longest on record … the expansion, which began in July 2009, will equal and then surpass the 106 months recorded between 1961 and 1969.”

If the expansion runs on through 2019 it could match the longest ever, from 1991 to 2001. So I suppose it is quite plausible that under the Trump presidency the US will indeed complete its longest ever period of uninterrupted growth. So what might end it? Here are five things to look for.

First and most obvious, the trade war with China. Of itself, and assuming some sort of deal is cobbled together, it ought not to. The numbers so far, for example $150bn of US imports from China being subjected to tariffs, sound huge, but in the totality of the US and Chinese economies they are almost modest. These are very big economies. Oxford Economics has calculated that if the proposed tariffs on both sides were implemented in full, US and Chinese growth would each be reduced by 0.3 per cent this year. But all experience of such negotiations suggests they won’t, and in any case this is a long way from pushing either economy into recession.

My concern is a broader one: that a wider retreat from freedom of trade and financial flows will lead to unforeseen market disruption, which will have a knock-on impact on the real economy. I cannot pin down how this might happen and by definition unforeseen disruption cannot be predicted. The financial market system is more robust than it was 10 years ago when we had the market crash, but the world economy is complicated. If the idea takes hold that it does not matter if politicians create a barrier that did not exist before, then they could do damage in ways they could not understand. (I think, by the way, that it is pretty stupid for European politicians to try to erect barriers to stop their companies buying financial services from the City of London after Brexit.)

Might this general retreat lead to a general global recession in three years’ time? I am afraid it might.

More immediately, there is the danger that the US economy is running too hot and will need a sharper-than-expected rise in interest rates to curb it. This was one of the points in the letter to shareholders by Jamie Dimon, the head of JP Morgan – that people were underestimating the pace of the economy and the possible rate of increase in rates. That is how economic expansions often end: the economy runs out of capacity and the strain shows in rising inflation and rates. Because these come faster than people expect, the economy then slows faster than intended.

There is a twist on this. Trade disruption would show in rising import costs, which in turn would feed through in inflation, bringing forward the rise in rates and the downturn.

All this feels a couple of years away. Is there anything more immediate? I can see two possibilities.

One is a crash in high-tech share prices. The turning point may already have been passed, though we cannot know yet. If there were a loss of faith in the valuation or performance of high-tech America, akin to the end of the dot-com boom, that could trigger a progressive retreat from all risky assets, which in turn could trigger the downturn. If people feel poorer, as they would were there to be a 20 per cent decline in US equities (and more in high-tech stocks), they would spend less and that could be enough to push the economy into at least a mild recession.

The other is some kind of military conflict involving the US. It isn’t helpful to speculate on what or where this might be. But we need to keep in mind that the transition from a United States acting as global police officer and the US in isolationist mode may actually increase the possibility of military engagement. Because the present administration is disinclined to intervene unless US interests are directly threatened, it might send misleading signals and end up having to intervene more aggressively. Even if this is unlikely, and I think it is indeed unlikely, it would be mad to ignore the possibility.

So when will the US expansion end? My call is in 2020.