The US economy is decelerating as the boost stimulated by tax cuts begins to dwindle and the trade war with China begins to bite. Other factors such as political discourse, partial government shutdown and poor Fed communications are hard to measure, but they clearly cast a combined shadow on the economic outlook. In theory, investors now expect that short-term rates will fall as the Fed's next move will be to cut interest rates. The rational for the Fed to cut is that the economy is slowing sharply, and recession warning lights are blinking.
Those who argue that the US will avoid a sharp economic fall point to the strong labor market and positive consumption data. With over 70% of GDP derived from this critical sector, jobs underpin American consumption. An extraordinarily strong hiring cycle has attracted new workers into the labor force, which has increased incomes and expanded the consumption base. If you also factor in the positive trend in wage growth, you have a compelling story for a soft economic slowdown that will avoid recession. However, the problem with having an ultra-strong labor market that has seen monthly job gains of over 200K is that it would not take much for companies to begin slashing payrolls due to perceived negative signals. The US employee psyche has been scarred by the extended hardship of the financial crisis, and if media and data light up to HR cuts, US consumer would quickly move into a defensive position — lower spending. It is critical to mention that left-leaning US media would then be happy to headline this as President Trump's economic failure, even if it meant their own downfall.