Could a recession be just around the corner?

The U.S. economy is growing at the fastest pace in five years, American companies are earning record profits and unemployment is at the lowest level in almost half a century.

So why are Wall Street and some economists suddenly worried about a recession?

Financial markets in particular have been signaling that trouble is brewing. The Standard & Poor’s 500, which tracks the biggest U.S. companies, has plunged as much as 6 percent since Dec. 4 because of worries about trade and slowing global growth. And a key bond metric that has presaged every recession since 1960 is warning another may be on the way.

As an economist who teaches and conducts research in international trade and finance, I see three credible concerns driving the worries.

Concerns have grown that the recent truce between China and the U.S. won’t last. AP Photo/Pablo Martinez Monsivais

Trouble in trade land

One major issue is the ongoing trade war between the U.S. and China.

The U.S. has imposed tariffs on about US$250 billion of Chinese imports – almost half of all trade with the country – in what I consider a misguided effort to get Beijing to buy more American goods and grant greater market access to U.S. companies. U.S. President Donald Trump has threatened to apply duties to all imports if his demands aren’t met.

In turn, China has put tariffs on $60 billion of American goods.

This is bad for the U.S. economy because tariffs tend to reduce trade, slowing growth and making goods more expensive for consumers. A just-released study from the right-leaning Tax Foundation, for example, found that Trump’s tariffs have so far lowered incomes by an average of $146 a year for taxpayers who earn $27,740 to $43,800 and have reduced U.S. hiring by the equivalent of 94,300 full-time jobs.

On Dec. 1, markets initially breathed a sigh of relief after Trump and Chinese President Xi Jinping reached a 90-day truce in the war, giving the two countries time to try to work through their differences. The optimism faded quickly, however, after conflicting reports emerged about what the two leaders actually agreed to and Trump called himself a “tariff man” in a threatening tweet.

The arrest of a Huawei official in Canada on a U.S. request further risked disrupting the tentative ceasefire, showing how fragile the Trump-Xi deal is and how easily the situation could return to a war footing.

Global headwinds

A second worry is slowing global growth.

In Europe, the combined economies of the 19 countries that use the euro barely grew in the most recent quarter – the lowest in four years – and economists are warning recession may be coming to the continent. At the same time, Britain’s impending and potentially chaotic exit from the European Union is expected to hammer its economy.