Global Economic Warning Signals Fail

From the market, consumption to the debt sector, these indicators that have always been regarded as reliable “wind vanes” of the economy's trajectory have now proven to have serious predictive deviations.

A recent report from the World Bank accurately depicts the widespread confusion currently troubling economic policymakers worldwide—“global economic growth is moving against the trend.”

Missed forecasts and growth deviating from expectations have always been commonplace in the economic field.

But the current situation is different. The traditional patterns by which corporations, consumers, investors, and workers respond to economic shocks are no longer reliable; those long-familiar reference points have also failed.

This has made the job of interpreting massive amounts of economic data more challenging than ever, much like a vehicle approaching a flashing yellow light that, instead of slowing down as expected, actually accelerates.

Let’s first look at consumer spending habits. Normally, if consumers are pessimistic about the economic outlook, out of concern for the future, they tend to cut back on spending.

This is the case in the United States: A survey shows that consumer confidence indices across various dimensions, from rising prices to the job market, have all fallen to twelve-year lows. But Americans' shopping behavior has not stalled as a result; household consumption expenditure has continued to grow steadily.

The same is true for the stock market. Despite the ongoing escalation of global trade wars, erratic policy adjustments, threats to central bank independence, worsening military conflicts and geopolitical tensions, high debt levels, and even potential financial bubbles in AI-related fields—chaos abounds—global stock markets overall have continued to surge.

Kenneth Rogoff, author of “The Dollar Dilemma: Global Challenges,” commented on the market’s stable performance: “Surprisingly, the market has not experienced more significant volatility.”

Many companies also seem unconcerned about the current uncertainty.

Neil Shearing, Chief Economist at Capital Economics, said: “Economics textbooks all point out that uncertainty is bad for economic growth, but there is not yet enough evidence to show that it has had a significant impact on the U.S. economy. Corporate investment should be the first area affected, but performance in this sector is currently very strong.”

In some ways, frequent errors in economic forecasting are not surprising. Even during periods of economic stability, economists often exaggerate the scientific precision of their field, as if economic operations are driven by some irresistible force rather than the uncoordinated actions of ordinary people with diverse goals and fluctuating moods.

The COVID-19 pandemic once dealt a heavy blow to the global economic system, and now, the global economic and geopolitical restructuring driven by the Trump administration has further increased this unpredictability.

The rule-based multilateral trade cooperation system is gradually being replaced by great power rivalry and mercantilism. Against the backdrop of rapidly overlapping changes, the historical patterns of economic operation have been broken.

Those indicators that have always been accurate predictors of economic recession have also failed. For example, a sudden sharp rise in the unemployment rate has historically been an effective signal for forecasting economic downturns.

But now, this correlation no longer exists. The “Sahm Rule,” proposed by former Federal Reserve economist Claudia Sahm, once predicted a U.S. recession in 2024, but this has not materialized.

Another recession warning indicator—the yield curve, which reflects the spread between long-term and short-term bond yields—has also failed. Normally, when the economy is strong, investors are unwilling to lock their money away for the long term, so long-term Treasury yields are higher than short-term ones.

Therefore, when the yield curve inverts, meaning short-term Treasury yields are higher than long-term ones, it has always been seen as a signal that the economy is about to enter a recession.

But this indicator has also failed, especially evident in 2022 and 2023.

The traditional link between U.S. economic performance and the dollar exchange rate has also broken down. When markets are full of risk, investors seek safe-haven assets, and the dollar’s exchange rate against other currencies typically rises with increasing uncertainty, but now the dollar exchange rate has dropped to its lowest level in years.

Dollar Index Trend

This index reflects changes in the dollar’s exchange rate against six major currencies, including the euro, yen, and pound sterling.

The current economic situation is indeed abnormal. However, aside from “irrational exuberance” such as possible overinvestment in the artificial intelligence sector, there are reasonable explanations for the failure of most warning signals.

Analysts once predicted that the Trump administration’s large-scale tariff hikes last spring would drive up prices, raise unemployment, and might even trigger a recession, but this forecast has now been overturned. Although tariff levels are still being repeatedly adjusted and remain unpredictable, many companies prepared by stockpiling inventory in advance, and some temporarily absorbed the additional costs themselves.

The strong performance in household consumption spending is actually driven by a small group of high-income families. Moody’s Analytics estimates that the top 10% of households by income contribute nearly half of all consumer spending.

People who are worried about their financial outlook have not stopped spending, but have simply shifted to shopping at discount stores.

There has also been a change in the structure of consumer spending. Recent credit card data from Bank of America shows that people are spending more in supermarkets during lunchtime, while spending at restaurants and snack bars has decreased, reflecting that rising prices have become a concern for the public.

The unusually weak dollar exchange rate can also be traced to the Trump administration’s high-tariff policies, while market concerns that it may intervene in Fed independence and exacerbate inflation have further depressed the dollar’s exchange rate.

Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, points out that economists have always relied too heavily on established experience and traditional patterns.

He said: “The economic system is an extremely complex entity, and we are living in a time of structural transformation. Therefore, it’s not surprising that those simple rules of thumb are becoming less and less effective.”

Editor: Guo Mingyu