Predicting a recession is virtually impossible, but there are some economists who think they have a pretty good idea when it’s going to happen — and most of them are saying “not quite yet.” These individuals don’t believe a recession is imminent due to the strength of the economy, but they feel it could start to unravel soon, possibly in about two years.
The Wall Street Journal surveyed about 60 economists from business, financial, and academic circles. 59% of those economists have their sights set on the year 2020. Another 22% say the economy won’t go south until 2021. And a few believe there won’t be another financial crisis until 2022 or beyond.
Bank of the West chief economist Scott Anderson told the Journal, “The current economic expansion is getting long in the tooth by historical standards, and more late-cycle signs are emerging.” Anderson is in the 2020 group of forecasters so we’ve got a few years to go.
Currently, the U.S. economy is still humming toward a record-setting tenth year of economic expansion. According to the Journal, economists are predicting, on average, that the gross domestic product will expand by another 2.9% this year. That’s 0.3% higher than it was last year. They also believe the unemployment numbers will go even lower than they are, from the current 3.9% to just 3.7% by the end of this year, and possibly down to 3.6% by summer of next year. Based on that kind of economic horsepower, they say there’s just a 15% risk of recession in the next 12 months. (1)
There are risks on the horizon, however. Forecasters worry about a potential trade war, inflation, and more aggressive rate hikes by the Federal Reserve. But according to the Journal survey, forecasters feel there’s strength in the global economy, and the U.S. economy won’t reverse course until the current expansion sets a new record, in the second half of next year.
The J.P. Morgan survey shows similar results. It asked more than 700 private clients in Europe and the Middle East about the U.S. economy, and when they thought it will slide into another recession. These are ultra-rich folks worth 30 million dollars or more. 21% of them believe we’ll reverse course next year, while 50% of them say 2020.
As CNBC reports, these high net worth individuals see the current U.S. economy as “firing on all cylinders” in part due to the Tax Cuts and Jobs Act. That may be a short-term economic boost however as federal spending grows along with the U.S. budget deficit, putting the nation at risk of insurmountable debt payments. U.S. debt is set to hit $2 trillion dollars in the next two years.
Microsoft founder Bill Gates doesn’t have any doubts about the next recession. He doesn’t know when it will start but told CNBC that it is a “certainty.” (2)
Cause of the Next Recession?
Economist Dr. Bill Conerly isn’t even trying to predict the next recession, but advises his clients to have a contingency plan. He wrote in a Forbes piece, that it helps to understand the likely cause of the next downturn, and points out that monetary policy has been the culprit in most of the recent recessions.
He says the Federal Reserve was created to help stabilize the economy, and that despite the board’s best efforts, it’s a very difficult job. He says, “They are all bright, well-informed people who sincerely want to help.” But he says that task is overly complex. He says our economy is driven by millions of consumers, workers, entrepreneurs, and government officials all making decisions based on a number of factors. Among them are economic circumstances, technology, attitudes, new tax rules, and business competition.
But he doesn’t believe that the next recession will be triggered by the Fed’s interest rate hikes and the unwinding of quantitative easing. We’ll be seeing some of that this year — with three or four short-term interest rate hikes, and some amount of QE reversals. The danger here is that none of these tweaks will produce obvious results right away, and that could prompt the Fed to go beyond what’s needed.
Conerly feels that an oil price shock could cause a new recession, but it’s not very likely. He says oil shocks have “played a significant role” in previous recessions, but are less likely now that the U.S. has reduced its dependence on OPEC.
He says that even though the Great Recession was triggered by a housing market crash, it’s unlikely that that will happen again. And he doesn’t believe a stock market crash is inevitable, although it’s certainly a risk.
He says the next most likely cause of a recession is a trade war. He says in his blog, “My best estimate is that President Trump will go to the edge of disaster, make a small deal, then step away from danger and declare victory. But this is a forecast of Donald Trump’s behavior, which I am hardly qualified to make.”
Other economies could dip into recession territory and bring the U.S. with them. Conerly says China and Europe are the two likely candidates. (3)
Signs of a Coming Downturn?
As difficult as it is to predict a recession, it’s even more difficult to recognize the start of a recession as it’s happening. But there are signs that we are approaching the end of this cycle.
Think Advisor has a list of ten red flags that often precede a recession, some of which I just mentioned. These signposts were compiled by Moody’s Analytics chief economist Mark Sandi, who says some have already happened, others have not.
- Beyond full employment. It’s typically 4.5% and we’re down to 3.9%.
- Oil price spike. U.S. crude oil prices surged 13% this year.
- Trade war. Tariffs and tough trade talk have increased the risk of a trade war.
- Inverted yield curve. That happens when long-term bond yields are lower than short-term rates. We’re not there yet, but close.
- Corporate/Treasury yield spread. That happens “when the yield spread between the Baa corporate bonds and the 10-year Treasury widens to above 200 basis points.” We’re now at about 170 basis points.
- Year-over-year decline in stock prices. We’re still on a bull run here, so this hasn’t happened yet.
- Reversal in unemployment rate. This happens when the unemployment rate rises by more than one-quarter of a point over three consecutive months. We’re not there yet.
- Copper prices below $2.50 per pound. This would indicate that the global economy is slowing down. Copper prices are currently above $3.00 per pound. So not a concern yet.
- A declining Australian dollar vs. the U.S. dollar. According to Think Advisor, the Australian economy is closely tied to global commodity prices, global trade, and China, so any loss in value for the Australian dollar also indicates a global slowdown. It’s currently trading slightly lower than its average.
- Decline in commercial and industrial loans at commercial banks. These loans were idling last year, but they’ve picked up this year.
Zandi says the U.S. economy is still in a “virtuous cycle.” We have falling unemployment, a high level of confidence, and increasing investment. He says, “This is not expected to change soon. When it does, it will be the closest thing to prove that a recession has begun.”
(2) CNBC Article
(3) Forbes Piece