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Warning signs point to global slowdown

Warning signs targeting deepening global economic slowdown – and the risk of recession – are flashing brighter.

Many of the biggest problems occur abroad. But the stock and bond markets signal that the threat of recession is spreading to the United States, the largest economy in the world, which is now in its longest expansion.

Economic production in Germany, the fourth largest economy in the world, contracted in the second quarter, according to a report Wednesday, while the report on factory production in China, the second largest economy, is lower than expected.

"It is almost as if we are beginning to see a textbook version of the pre-regression period",

Nikolai Akins,

CEO of an Ohio based company

American electricity

, said in an interview on Wednesday. The company provides electricity to industrial, commercial and residential customers in 1

1 states.

The good news is that the United States does not face serious excesses to develop, as it did in the mid-2000s with the housing boom or the late 1990s with gains from technical stocks. Because of this, some economists say any slump can be mild.

Many past recessions have been traced to high interest rates set by the Federal Reserve, as in the early 1980s; to bubble burst, such as a bust dotcom of 2000 and 2001; to financial volatility in 2007, 2008 and 2009; or some combination of the above.

Some experts predict that if a recession occurs, it will be driven by lower business investment this time.

Alan Sinai,

an Economics forecaster said that if corporate profits slip away, it can lead to less investment and then less hiring, creating a self-fulfilling contraction process. Mr Sinai suppressed his recession risk assessment for the first time in years.

Corporate revenues and investments are already declining. Corporate earnings before taxes fell 2.2% in the first quarter compared to a year earlier, according to the Commerce Department. And US business investment fell 0.6% year over year in the second quarter after reaching quarterly growth rates of over 8% in late 2017 and early 2018

"I think trading is a big mistake in politics, "Mr Sinai said. He agrees with President Trump that China has not complied with world trade rules and must face it. But he said tariffs used by the US against China are hurting at home. "There must be a better way to do it," he says.

The Fed cut short-term interest rates in July, partly in response to slower global growth, and investors widely expect this to continue with interest rates falling. Lower rates can help stimulate investment and spending by encouraging households and businesses to borrow more.

"I think the US economy has enough power to escape [a recession],"

Janet Yellen,

The former Fed chairwoman said in an interview about the tape, which will be aired Friday on Fox Business Network's "WSJ as a whole." "But the odds are obviously higher and higher than I am comfortable with."

One big factor behind recent problems is the decline in world trade. Customs duties have increased the value of hundreds of billions of dollars worth of goods produced by the world's two largest economies, hitting farmers, producers, retailers and more.

For export-dependent economies such as China and Germany, trade disruptions mean immediate problems, the US is less dependent on exports, somewhat isolating its economy.

However, because US multinationals have spent the last two decades building huge global delivery networks, uncertainty about trade and the changing costs of doing business have led to trembling investment.

Analysts have been peppering American business executives – especially manufacturers – in conference calls in recent weeks about whether they see a softening of business and are ready for a downturn.

"It is no secret that, given the level of uncertainty currently around [a]there are a number of global problems that, from a business orientation point of view, we are certainly seeing more of this now,

E. Scott Santie,

CEO of Illinois Toolworks Inc., a manufacturer in Glenview, Ill., said when asked about the risks of a recession during a conversation last week.

In a Wall Street Journal poll published last week, economists on average saw a 33.6% probability of recession over the next 12 months, up from 30.1% in July and the highest level in the 2011 Journal Survey. the probability was 18.3% a year ago.

But with low unemployment, income increases and household savings higher than those of the late 1990s or mid 2000s, many consumers are in better shape to withstand the storm.

For now, slow growth is a problem for many analysts. Macroeconomic Advisers estimates the economy is growing at a 1.7% annual rate in the current quarter, well below the 3% rate the Trump administration says it hopes to achieve in the long run.

An economy expanding at less than 2% tends to descend into negative territory in the face of unforeseen shock. But the domestic economy – largely driven by consumers, not exporters – can withstand the day.

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Michael Ufner,

AutoTeam Delaware's chief executive, who owns three car dealerships, said sales were modest this year, despite higher new car prices. He said his customers seem uneducated, largely because interest rates remain low, making it easier for households to borrow for new cars.

"Although the average transaction price has gone up, most consumers look at their budgets and see that they can afford a car or truck that is a little more expensive today than it was a year ago," he said.

Others are more exposed to global winds.

Mr. Akins, CEO of US Electricity, describes the impact of the contamination caused by tariffs that have hurt US manufacturers of metals, chemicals and other products. Electricity sales for industrial companies grew steadily for most of last year, but it was equal in the fourth quarter of 2018 and the first quarter of 2019, after which it fell in the second quarter.

Companies are affected by other factors, including the strong dollar, which increases the price of exports when sold in foreign markets, and the higher salaries that companies have to pay to retain employees in a period of historically low unemployment.

However, Mr Akins said there was still no noticeable drop in investment. If the economy goes into recession, it is in a far stronger position than it was in 2009, he added.

"I think we certainly don't start as far in the trough as we did before the previous recession," he said.

Corrections and Amplifications
Nicholas Akins is CEO of American Electric Power Co. An earlier version of this article misspelled his last name as Atkins.

Write to Josh Mitchell at joshua.mitchell@wsj.com and John Hilsenrath at jon.hilsenrath@wsj.com

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