Janet Yellen on the economy: ‘There is good reason to worry’

Janet Yellen is concerned the US-China trade war may end the longest economic expansion in American history.

Yellen, the first woman to ever lead the Federal Reserve, doesn’t think a recession will strike in the coming year. But she doesn’t sound confident in that prediction.

“I have to say, the odds of a recession are higher than normal and at a level I’m really frankly not comfortable with,” Yellen said Thursday at the World Business Forum in New York.

The former Fed chief said there are “definitely downside risks” facing the US economy, including a “marked slowdown in global growth” and vast uncertainty sparked by trade tensions.

“There is good reason to worry,” said Yellen, who served as chairwoman of the Fed between 2014 and 2018. President Donald Trump replaced Yellen with Jerome Powell last year.

Recession fears have recently receded on Wall Street.

The Dow rocketed past 28,000 last week as investors cheered hints of progress in US-China trade negotiations, signs of stabilization in the economy and more easy money from the Federal Reserve. However, US stocks retreated a bit in recent days on concerns that a preliminary trade agreement may not happen until 2020.

Overall, the US economy is “still doing okay,” Yellen said, pointing to the fact that the unemployment rate stands at just 3.6%, near a 50-year low.

Businesses are in such desperate need of labor that they have hired less skilled workers and individuals with criminal records. Yellen noted that those are very positive developments because it gives those workers much-needed experience and training.

And unlike last decade, Yellen said, American households don’t appear to be saddled with too much debt. Consumer spending continues to be the bright spot in the US economy.

Yellen warns of ‘spillovers’ from trade war

However, the manufacturing industry has been slammed by the trade war and weak global growth. China’s economy grew during the third quarter at the slowest pace in 27 years. And Germany only narrowly avoided a recession.

Yellen warned that those troubles could still infect the rest of the economy.

“We could see spillovers from global weakness and trade into services and into the job market,” she said.

Already, business spending in the United States has contracted for two consecutive quarters, defying projections from the White House for an investment boom driven by the corporate tax cuts.

“The easiest thing to do in the face of uncertainty is to put investment projects on hold. And that’s what we’re seeing in the United States and all around the world,” Yellen said.

Trump, who has called himself the “Tariff Man,” has used tariffs as a negotiating tool to get China to stop trade practices that many businesses see as unfair.

But there is also a cost to the tit-for-tat tariff battle.

“These tariffs are taxes on American consumers and businesses,” she said. “It’s making it more expensive and more difficult to do business and to control costs.”

Yellen also sounds skeptical of the recent euphoria in markets over a potential preliminary trade deal.

“Even if we see a so-called Phase One trade agreement, that’s only about lowering some of the trade barriers that have recently been put into place,” she said, adding that these barriers are having a “very negative” impact on the United States and other countries.

Business debt could be a problem

If a recession does strike soon, Yellen sees three major problems.

First, the Federal Reserve has little room to lower interest rates because rates are already historically very low.

At the same time, Yellen noted that high federal budget deficits during a time of economic prosperity means that the United States will have less flexibility to mount a forceful fiscal rescue.

And Corporate America, encouraged by a decade of extremely low borrowing costs, has binged on large amounts of debt.

“If there is a recession, there will be a lot of companies that will be in trouble because of all the debt they’ve piled on,” Yellen said.