OPINION:
Recession risks are emerging as consumers grow pessimistic, and the COVID-19 recovery is increasingly driven by the wealthiest 10% of households by their stock market gains.
At the end of 2022, economists thought the pace of recovery was too swift and consumers would slow down, but that recession didn’t materialize.
Since Federal Reserve Chairman Paul Volcker tamed the great inflation of the early 1980s, the U.S. economy has steadily grown. Major recessions have been caused by external shocks, such as the misregulation of financial institutions that enabled the global financial crisis or natural events such as COVID-19.
Stock gains are driven mostly by the Magnificent Seven — Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla — and each has vulnerabilities. Therefore, the 25% gains registered in 2023 and 2024 are not likely to repeat.
A Black Swan (high-impact event) could emerge in one of six places.
First, massive investments in artificial intelligence and data centers could evaporate if another disrupter, such as China’s DeepSeek, upsets investors’ confidence in those bets and deflates Magnificent Seven stocks.
Second, bird flu poses the risk of another epidemic.
A new variant caused the hospitalization of a Canadian teenager and a death in Louisiana. Signs of the virus have turned up among three American veterinarians.
It’s not comforting that the secretary of health and human services is a vaccine denier, the Centers for Disease Control and Prevention is enduring disruptive staff cuts and a Biden-era contract with Moderna to develop bird flu shots is being reevaluated.
Third, banks specialize in short-term borrowing — depositors have quick access to funds — and long-term lending without absolute certainty about repayment.
After the global financial crisis, bank regulations tightened, loans became tougher to obtain and businesses turned to private credit, where aggregators such as Apollo Global Management, Ares Management and BlackRock collect pools of money from private investors and sovereign wealth funds to make loans too risky for conventional FDIC-insured deposits.
Now, banks such as J.P. Morgan are exposed by directly entering the market or lending to aggregators seeking to leverage their investors’ funds.
Supposedly, those won’t create risks for FDIC-insured deposits. So were the fabled Structured Investment Vehicles that repackaged dodgy real estate loans and precipitated the global financial crisis.
Fourth, commercial real estate is finally turning over because private investors believe rental markets are stabilizing, and banks can no longer extend loans on office buildings whose occupancy rates have fallen thanks to working from home.
Many commercial real estate mortgages are held by regional banks, the same smaller institutions central to the savings and loan crisis of the late 1980s.
Both private credit, by intent and design, and existing commercial real estate mortgages, by an unforeseeable pandemic and new work-from-home technology, are inherently risky, and many banks are vulnerable.
The Trump administration promises much lighter bank regulation and more political interference with the regulatory process. The latter could prove a genuine peril to financial stability before we are finished.
Fifth, since 2016, the federal deficit has grown from 2.9% of gross domestic product to 6.6%, and the House framework for renewing the 2017 Tax Cut and Jobs Act and funding the president’s agenda could take that to 8%.
A national debt soon exceeding 100% of GDP and advancing at perhaps 3% a year is causing investors to demand higher yields on U.S. Treasurys. This fall, the Federal Reserve cut the federal funds rate a full percentage point, but yields on critical benchmark 10-year Treasurys rose.
Investors demanding increasingly higher interest rates on long Treasurys to compensate for heightened inflation risks could undermine the dollar’s reserve currency status, reduce Americans’ ability to consume 3% more than they produce and force the federal government to cut back spending and raise taxes. One or in combination, those could instigate another Great Recession.
Most important, President Trump wants to emulate President McKinley, whose tariffs increased protection to levels rivaling the disastrous 1930 Smoot-Hawley tariffs. The former contributed to the Long Depression of the 1890s, and the latter exacerbated the Great Depression.
The threat of these tariffs has encouraged trading partners to seek greater autonomy in agriculture and other key industries and businesses and to expensively rearrange supply chains.
Much like the McKinley tariffs, these will push prices of everyday goods out of range for many households, and reduced real incomes, profits and the like could easily instigate a recession and stock market collapse.
Mr. Trump’s economics team must know about this history and these market risks. Still, cautions premised on this knowledge may not be welcomed by a president who requires absolute loyalty to his agenda.
Car prices will jump with the tariffs on Canada and Mexico.
There’s ignorance, willful ignorance and willful and malicious ignorance.
A Black Swan may be hatching in the West Wing right now.
• Peter Morici is an economist, emeritus business professor at the University of Maryland and a national columnist.
Please read our comment policy before commenting.