Business

Trade wars. Brexit. Government shutdown. Uncertainty is everywhere

Posted January 16, 2019 10:39 a.m. EST

— Trade wars. Recession fears. Market mayhem. Oil turbulence. Brexit. And the longest government shutdown ever.

Around nearly every corner, crucial question marks are looming over the business world right now.

Will the US economy grow at 3% in 2019 or succumb to a recession? Will the United Kingdom be in or out of the European Union? Will the Fed raise rates twice or not at all?

Taken together, these forces appear to be driving up uncertainty to elevated levels. That backdrop makes it tricky for businesses, households and investors to plan for the future.

The risk is that poor visibility causes companies to rein in spending, further delaying the investment boom that the US tax overhaul was supposed to spark.

"We are in an uncertain environment on the policy front and the economic front — and that spills over into the corporate front," said Erin Browne, a managing director and portfolio manager at PIMCO.

In some ways, a murky outlook is common as economic expansions age and the next recession begins to take shape on the horizon.

"As you move towards late cycle, the level of uncertainty increases. And the level of volatility around economic outcomes also increases," Browne said.

One measure of this volatility, the global economic policy uncertainty index, shot to a record high in December. The index, which goes back to January 1997, measures how often newspaper articles in 20 countries contain terms related to the economy, policy and uncertainty.

Trade war lingers, Brexit mess deepens

There's no shortage of questions swirling around board rooms right now. Consider the headlines from just the past few days.

The United States and China, the world's two biggest economies, remain mired in a trade war. Fragile talks on reaching a trade deal have yet to produce a breakthrough.

In the meantime, economists say the tariff spat is exacerbating the sharp slowdown in China. And it's at least partially to blame for the sudden deceleration of America's manufacturing industry and an outright contraction in China's.

Apple (AAPL), the world's largest public company, recently said trade tensions helped lead to soft iPhone sales.

In Europe, the British parliament resoundingly rejected Prime Minister Theresa May's Brexit deal, raising the risk that her government collapses. The vote also deepens questions over whether the UK will crash out of the EU or decide to remain or further delay a decision. A messy divorce could spark market turmoil and fuel a recession in the UK, the world's fifth-biggest economy.

Meanwhile, Germany's economy contracted in the third quarter and 2018 growth was the weakest in five years.

"The rest of the world is clearly tugging the US downward," said Browne.

Volatility in Washington, energy

In Washington, the shutdown of the federal government stretched into its 26th day on Wednesday. Each day is causing more damage to the economy — and more pain for the 800,000 federal workers going without pay.

Corporate America is beginning to feel the pain as well. Delta Air Lines (DAL) estimates that fewer bookings caused by the government shutdown will cost the company about $25 million in January.

JPMorgan Chase (JPM) CEO Jamie Dimon warned Washington on Tuesday that if the shutdown lasts for the entire quarter, it could reduce economic growth to "zero."

Meanwhile, the oil patch is living up to its well-worn reputation for volatility. US oil prices crashed into a bear market last fall, plunging as much as 44%. Crude has since spiked 22% in just three weeks on signs that OPEC is dialing back production.

The gyrations in the energy market won't make the budget process any easier for airlines, trucking and other businesses that rely on crude.

The oil turbulence also helped lead to the shutdown of the junk bond market in December, the first month without a US high-yield bond offering in a decade.

'Wild' market swings

Wall Street is still mending its wounds from the worst December stock market performance since the Great Depression. Extreme volatility led to sharp trading revenue declines at JPMorgan Chase and Citigroup (C).

Even though US stocks have rebounded, there's always a risk that prolonged market mayhem dents consumer and business sentiment enough to impact the real economy.

"We saw wild risk-off swings," John Shrewsberry, Wells Fargo's chief financial officer, told reporters on Tuesday. "That could have a knock-on effect to invest confidence, and maybe consumer and business confidence."

Fed policy remains another major mystery. Just a few months ago, Wall Street was prepared for the US central bank to raise interest rates another four times. But market stress and slowing global growth caused the Fed to hint that it may be done with rate hikes, at least for now.

Even Esther George, a hawkish Fed official, said in a speech on Tuesday that it "might be a good time to pause" rate hikes. And George acknowledged it's "unclear whether, or how much," the Fed's shrinking balance sheet is causing borrowing conditions to tighten.

Recession or slowdown?

Economists and investors continue to clash over whether the American economy is headed toward a recession, or just a sharp slowdown like the one experienced in 2016.

Nearly half of the US CFOs surveyed by Duke University expect a 2019 recession. And 82% believe that a recession will strike by the end of 2020.

But fund managers' point of view is quite different. Just 14% of them expect a global economic recession this year, according to a Bank of America Merrill Lynch survey published on Tuesday.

"Their diagnosis is secular stagnation, not a recession," Michael Hartnett, Bank of America's chief investment strategist, wrote in the Tuesday report.

Still, the risk is that extreme uncertainty becomes a self-fulfilling prophecy, speeding the arrival of the next downturn by causing business and consumer spending to dry up.

"It's inevitable we will get a recession in the next few years. The question is timing," said Browne. "This could pull forward the onset of the next recession."