Despite some 750 military bases in about 80 countries the U.S. is often accused by its European allies, anxious about American protection, of being “inward-looking,” “isolationist” and downright “selfish.”

When Donald Trump ran, and won, on a slogan “America First,” Germans fearfully proclaimed -- “we are on our own” -- but spent nothing on defense, concentrating instead on mercantilist policies and the world’s largest trade surplus of 8% of GDP.

The same scenario could unfold if Trump became again the Republicans’ standard bearer in next year’s elections. Recession fears would make “America First” the main election issue.

The irony is that most of those recession forecasts can be safely dismissed. They are part of Wall Street’s “one-day-wonder” trading news.

Traders’ other popular forecasts are based on the term structure of interest rates (yield curve speculations) and asset trading paths (“shoulders,” “elbows,” etc.).

The structural forecasting method is the most difficult because it is based on an economy represented as a system of difference or differential equations. This method uses formal models to estimate interactions of key economic variables.

No rush to cut U.S. interest rates

Here is an example of structural forecasting to understand a typical Wall Street vs. Federal Reserve (Fed) estimate of where the U.S. economy is headed.

At the end of trading last Friday, December 1, 2023, Wall Street was betting on an inevitable recession. That triggered a huge bond market rally, while the Fed held firm to its current interest rate policy to tame inflation.

The Fed takes a different view because more than 80% of the U.S. economy is driven by jobs and incomes.

And things there don’t look bad at all. The unemployment rate has stabilized between 3.7% and 3.9% -- a range that is traditionally considered as the full-employment unemployment rate.

Incomes also look good. In the three months to October, real disposable (after tax) personal incomes grew 3.8% compared to the same period of 2022. So, households have jobs and growing real earnings. A stable savings ratio also means that people are not using savings to maintain their usual lifestyles.

Inflation has come down considerably, although the core consumer prices at 4% are still double the Fed’s medium-term target of 2%.

Based on those data, the Fed, correctly, sees no need to hurry into any credit easing.

Churchill: “… jaw to jaw is better than war”

The progress on inflation is fragile because volatile food and energy prices are key to inflation control. Adverse price developments of those two items could radically change the inflation outlook in the months to come.

And that’s where wars in the Middle East and Central Europe, with hostile confrontations in East Asia, could complicate food and energy supplies.

In the Middle East, Israel’s prime minister declared he would not stop the war on Hamas (Islamic Resistance Movement) until that “mortal enemy” is destroyed. Hamas won the Palestinian legislative elections in 2006 and controls the Gaza Strip (population 2 million) since 2007. In addition to Gaza Strip, Israel’s military now operates in the Palestine’s West Bank, Syria and Lebanon. Hamas supporters, such as Qatar, Iraq and Iran, are Israel’s other military targets.

Russia also says that it will not stop its “special military operation” until Ukraine is “demilitarized” – a vast and open-ended project.

In East Asia, U.S. and China are on a war footing. Pentagon calls out “coercive and risky intercepts” of American air and naval assets in international air and sea lanes that China considers its sovereign territory.

Partly responding to these global tensions, OPEC Plus, led by Saudi Arabia and Russia, are cutting oil supplies. They will be joined by Brazil’s oil cuts next month. The Ukraine war is also causing declining or specially directed food supplies.

The U.S. is a large energy and food producer, but its market is not completely shielded from world prices of those two critically important items for economic growth and price stability.

Economic forecasters can capture those contingencies by assigning a range of probabilities for various outcomes.

Doing that now, one would have to assign a very high probability that the wars in Middle East and Ukraine will continue for some time because the warring parties are nowhere close to their categorically stated objectives.

The same is true of the U.S.-China confrontation – euphemistically called “strategic and systemic competition” -- because Washington and Beijing only agreed on flimsy “guardrails” in the form of military hotlines to avoid “miscalculations and misunderstandings” when their air and naval assets clash on China’s contested maritime borders.

With about one-third of the U.S. economic activity generated in the external sector, forecasts of prices, demand and output will be increasingly difficult as world trade becomes fragmented by fault lines dividing the West and the Global South.

The Fed knows that. Day traders are different. They survive on trade volumes rather than bets on longer-term asset prices.