1. Military Conflicts
The most dangerous situation for the economy is the possibility of military conflicts between the United States and China, Russia, North Korea and Iran. Tensions with Russia and Iraq are based to some extent on sanctions. China continues its efforts to take disputed areas of the South China Sea. North Korea has nuclear weapons technology and long-range missiles, and recent information says its programs are still active.
The recent military challenge by Russia toward Ukraine which involves the navies of each country shows how quickly these conflict can arise.
It would only take one major incident to start a military conflict that could knock down consumer confidence and undermine companies’ ability to do business in the regions where there are military clashes.
2. Trade Tensions and Tariffs
The trade tensions between the Trump Administration and China have reached levels at which tariffs on goods are as high as 10%. The Office of the United States Trade Representative (USTR) has released a list of approximately $200 billion worth of Chinese imports that will be subject to additional tariffs. In accordance with the direction of President Trump, the additional duties became effective on September 24, 2018, and initially will be in the amount of 10% on the USTR list. Starting January 1, 2019, the level of the additional tariffs will increase to 25%.
President Trump recently said he would move ahead with tariffs that are as high as 25% for some imports, and this may affect Apple iPhone prices.
Groups from farmers to retailers have complained that these duties could ruin their businesses. As the problems spread they will drive up unemployment and cut consumer spending.
3. Wild Fluctuations in Oil Prices
The future of oil prices is in great flux. The huge boom in American and Canadian shale output has added tremendously to the overall global supply of oil. The United States, as a matter of fact, has become almost energy independent. At the same time, data from the International Energy Agency shows that worldwide demand has flattened, to some extent because of a drop in supply from emerging markets. These factors would seem to argue for oil prices to range close to the current price of $51. However, crude was at $74 just a month ago, and the circumstances that drove it up have not entirely disappeared.
Venezuela, which has the world’s largest proven oil reserves, is in political and economic turmoil. Iran’s exports will be curtailed by sanctions. Tensions with Saudi Arabia have not been so high in years after the murder of journalist Jamal Khashoggi. The Saudis already have said they plan to cut production.
From what individuals pay for gasoline and heating oil to airline fuel prices to petrochemical products, a spike in crude would be damaging. (Ironically, a very sharp drop in oil prices is sometimes the sign of a falloff in global demand, and thus a signal of an overall slowdown in worldwide GDP.)
4. Rising Inflation
Elevated levels of inflation have been a great enemy of the American economy since the country was founded. It erodes consumer buying power by raising prices of goods and services faster than wages. Companies that need to pay more for their cost of goods sold find their margins, and often profits, tightened.
While inflation has been tame in the United States since the Great Recession, rising prices have begun to creep back into the economy. Part of this is because of the U.S. trade war with China. And the cost of some farm goods like wheat has started to climb. This has started to be passed through to Americans in the price of everything from hamburgers to soft drinks. Another reason for inflation is prosperity. As unemployment falls and wages begin to climb, companies believe they have a better chance to lift prices. In September, wages rose 3.1% over the past year, and this was the sharpest increase in nine years. Watch holiday sales volume and prices for a hint about the direction of inflation.
5. Interest Rates
Interest rates are a first cousin of inflation but can come from a completely different direction. For example, there are currently debates among the Board of Governors of the Federal Reserve and the presidents of some of the Federal Reserve banks about whether interest rates should be raised by the central bank or kept the same. One group argues that higher interest rates tamp down inflation. Another says higher interest rates make it more expensive for consumers to get car and home loans and businesses to get loans for expansion. This second group reasons that higher interest rates could take the wind out of the sails of any expansion because consumers would pull back on buying, including the purchase of homes. Mortgage refinancing recently hit an 18 year low due to higher rates.
6. Falling Housing Prices
Nothing makes tens of millions of Americans feel as prosperous as when the value of their homes is rising and the equity they have in their homes is increasing. The Great Recession was an example of how much a sharp drop in these prices can do to undermine the entire economy. Home equity is still a primary source for credit among many Americans. It is also a nest egg for Americans as they move toward retirement. The value of homes has risen relentlessly for five years. In many markets prices actually have doubled since the home price trough that hit most markets in 2008. These include several cities in California, Nevada and Florida, which were also hit hardest in the downturn.
More recently, however, housing starts have started to fall, as have home prices in several markets. U.S. mortgage rates recently hit a four-year high, primarily because of rising interest rates, which presents another barrier to home price increases
7. Strength of the Dollar
The strength of the U.S. dollar has the potential to create both economic and financial turmoil. The dollar has been rising in value as U.S. interest rates have increased, compared with the currencies of the rest of the world. Over the past 10 years, governments and companies in emerging markets have borrowed trillions of dollars. Many of these borrowers do not earn dollars, so when the dollar goes up their debts become harder to pay and some may default.
Broad upheaval in emerging markets, which we have already seen in Turkey and Argentina, has the potential to spill over into the U.S. stock and bond markets. A strong dollar hurts exports, which would undermine U.S. jobs related to selling goods and services abroad.
8. Climate Disasters
Climate change is generally considered a long-term problem. That view has become less defensible recently because of a sharp rise in deadly storms and fires. The recent California fires are the worst in that state’s history. The insurance costs of the most deadly of these have run into the tens of billions of dollars.
The new Fourth National Climate Assessment warns about long term effects of climate change on GDP, some of which have already started
The disruption of business activity has become more severe as the problem has grown. The cumulative costs of hurricanes alone were $306 billion in the United States in 2017, according to the Office of Coastal Management. That number almost certainly will be higher in 2018. CoreLogic, which provides property data, forecasts that more than 48,000 homes are at high risk for wildfire damage because of current California fires. This is a “cumulative risk recession,” which means that no one event is economically catastrophic, but several in a short period could be.
9. Black Swan
Black swan events are unexpected, very infrequent and some economists would say random. During the Great Recession, it was an unexpected rise in mortgage defaults that triggered drops in home prices. As an example of an emerging and unpredictable problem, some economists and traders believe that in the unlikely event that Italy leaves the European Union, it would spark a financial crisis that would destabilize Europe and spill over into the rest of the world.