The stock and bond markets are freaking out again. The
Can an inverted yield curve cause a recession? No. I've covered this before. This only matters if you think that bond investors have magical, recession-predicting powers. Empirically, an inverted yield curve does tend to come before a recession, though.
However, recessions tend to have causes. Those causes are either exogenous shocks-- stuff like a housing bubble bursting-- or policy causes.
And here's where Trump comes in. One of the traps into which it was easy to fall, particularly for Trump detractors, was to assert that Trump's basic vileness and incompetence would necessarily cause a recession and bring about his own political demise. Instead, the economy continued to flourish. Yes, that italicized word is vitally important. Trump would love to have you believe that the "great recession" began when some black, muslim Kenyan took the oath of office, and didn't let up until the deal-making-est deal-maker who ever dealt a deal started dealing his deals in the Oval Office. Actually, GDP growth went positive in Q3 of 2009, unemployment has been declining steadily since about October of 2009, and nothing in Trump's Presidency has been out of line with what has been happening since Obama took office. Economically, anyway. Steady course, with a continuation of the economic expansion that just didn't stop when Trump took office.
Like I said, recessions have causes, and putting a vile, incompetent person in the White House is not intrinsically contractionary, in economic terms. Exogenous shocks can be, as can policy.
When the Fed raises interest rates, that can bring on recessions, but only if done too quickly. Raising interest rates is intrinsically contractionary, but magnitude matters, and the increases have been small. Whether or not the Fed has been right, the increases haven't been close to big enough to be recessionary.
Exogenous shocks? We haven't had any. Trump is the luckiest person in history. He just is. Never in human history has anyone been luckier. There are 7.5 billion people on the planet right now, and due to random chance, some of them will have stuff go right for them, just out of dumb luck, with special emphasis on dumb. Those of us who teach statistics refer to the lottery as the "stupidity tax," but by random chance, over time, you get some lucky asshole who wins the lottery twice. That lucky asshole is Trump. No exogenous shocks.
Given enough time, the probability of an exogenous shock goes to 1, but in going on three years, no exogenous shocks so far.
Aaaaaand, policy. Here's the thing about policy. Stupid policy is not definitionally contractionary. Bad policy is not definitionally contractionary. We can evaluate policy by many criteria other than their effect on GDP growth (or inflation, or, or, or...).
Consider a tax cut. Standard Keynesian economic theory says that you cut taxes in a recession to bring the economy back to stability (and increase spending, of course), and raise them in an expansion to pay off what you just did. There are variations of tax cuts, some of which are more effective than others, and you can argue about which tax cuts are more defensible on a variety of grounds.
A tax cut during an expansion? Stupid, on Keynesian principles. Not contractionary, though! A tax cut is not going to be contractionary. It could even be inflationary! That's just another kind of bad.
Was the Tax Cuts and Scams Act inflationary? No, but it was timed during an expansion, which violated Keynesian principles, and it wasn't a true simplification of the tax code, as it was billed. It was a swiss cheese-ification of a reform, filled with so many holes Trump didn't know which one to grab. But at least if it's swiss, Trump think's it's OK because it's European.
The Tax Cuts and Scams Act was not tax reform. It was a tax cut, badly timed, and badly designed, written literally on the margins of the page, at the last minute, on the floor of the chamber. Yes, seriously. Bad policy, regardless of what you think of tax cuts as a concept.
Recessionary, though? No. And this is one of the places the left goes wrong. Post hoc ergo propter hoc. Clinton raised taxes, and the economy grew. Bush cut taxes and we had the great recession. Therefore Keynes was backwards. Tax increases help the economy and tax cuts tank it!
No, that's ass-backwards, but I see this all the time. It's just that fiscal policy is far from the only factor in macroeconomic growth. The late 1990s had the tech boom, for example, and 2007-8 had the burst of the housing bubble, and the crash of the derivatives market, which spilled over into everything. Fiscal policy had squat to do with either.
And the Tax Cuts & Scams Act, like most of Trump's policies, wasn't contractionary, just as being incompetent isn't intrinsically contractionary.
But you know what can be? A trade war. The trick is the timing.
Trump pulled back on some of the next round of his idiotic tariffs, basically admitting (to the degree that he is capable of admitting anything) that his mercantilist nonsense is contractionary, and the Fed is responding to contractionary trade policy. Trade wars also escalate, and Trump can't figure out a way out of this, because he never had a plan. Planning isn't his thing.
Could a trade war bring on a recession? With sufficient escalation, yes. But when?
The Abramowitz predictive model of presidential elections uses GDP growth in Q2 of the election year to forecast the election. So, let's be nit-picky here. Is a bad quarter possible then? Yeah, it is. Suppose a recession formally starts in Q2 of next year. The technical definition of a recession is two consecutive quarters of negative GDP growth. (Why don't we say "shrinkage?" Seinfeld.) If GDP goes negative in Q2 of next year and stays negative in Q3, then you've got a recession during the election, for all practical purposes. In principle, the economy could come out of it in Q4, but the data won't come out then, and some time in October, you get a formal announcement of a recession based on the Q2-Q3 sequence.
What happens then? We... don't know. Normally, I'd say the president is toast. I won't say that here. Why not? Well, here's what the normal sequence would be.
The president tries to shift blame. This would actually be pretty in-character for Trump. Blaming everyone else for anything bad is standard operating procedure for Trump. Currently, his schtick is to blame Powell for what-if-there's-a-recession, but that's not likely to fly in a campaign. So, standard operating procedure would be to try to blame the other party in Congress. Normally, it wouldn't work. But...
Other scenarios:
The president stirs up white nationalist sentiment and blames immigrants, minorities, China and an assortment of others. Is anyone going to tell me this would be out of character for Trump? What happens? One of two things. It looks like a desperation maneuver, people turn on him, and he loses. That's the prediction of people who think the political system still works in anything like a normal way. What happens, though, when you just try as hard as possible to mobilize every racist in the country? We... don't know. This would basically be taking his 2016 campaign, and turning it up to 11.
Deny there's a recession. Normally, this would be just completely insane, but with Trump... can anyone really discount the possibility that he'd just lie? Or that the modern GOP would just go along with the lie? With Fox and the rest of the Republican media apparatus carrying the lie? What then?
Trump loses, says the election was rigged, and refuses to step down. I'm not going to go into detail here because I've addressed this before, but look. This is serious. There is no way that we have an election night next year in which a Democrat defeats Trump, Trump accepts the loss, steps down voluntarily, and we have an ordinary transition of power. No. Way. The only question, presuming a Democratic victory, is how far Trump goes. The range of options goes from demanding recounts across the various states to options far scarier, which you cannot discount for a man so enthralled by Vladimir Putin, Kim Jong Un, Viktor Orban, and every other psychopathic dictator, and so contemptuous of anyone around the world democratically elected in the western tradition.
As I wrote in my superposition post, a Trump reelection may simply allow us to pretend that democratic processes still function because we can't see whether we live in a universe in which they do, or one in which they don't. A recession would mean opening Schrodinger's box.
Hence the uncertainty.