Not Your Grandfather’s Recession
- by: Hank Berkowitz
- September 16, 2019
Our annual CPA/Wealth Advisor Confidence Survey™ shows that almost half of advisors (47%) expect a recession within the next 12 months–up from one third of advisors (33%) who thought so at this time a year ago.
Now that we have an inverted yield curve on top of escalating trade tensions with China, slowing business investment and waning consumer confidence, it’s only natural to feel our 10-year economic win streak will eventually run out. Sure, it’s a record-long period of prosperity, but Australia’s economy has gone 28 straight years without a recession. Don’t think we’re on the brink of a contraction just because the actuarial tables suggest it.
As Jeanna Smialek explained in Friday’s New York Times, many economists expect growth to weaken slightly over the next couple of years — without actually contracting — “and that distinction is crucial.” Federal chair, Jerome Powell, said last week that “the most likely outlook for our economy remains a favorable one with moderate growth,” and “our main expectation is not at all that there will be a recession.”
Also don’t count on a recession call to be made before the 2020 elections–it takes anywhere from six to 20 months for a recession to be officially declared after it starts. According to Smialek, weak GDP growth isn’t great news, but it’s still counts as growth. That means it shouldn’t be mistaken for a recession:
“While economic growth has moderated only slightly so far, forecasters think America is headed for a deeper pullback. The economy expanded by 2.9 percent in 2018, and economists expect that pace to slow to 2.3 percent in 2019 before falling to 1.8 percent next year, based on the median in a survey by Bloomberg. Several particularly glum forecasters even expect the economy to shrink for one or two quarters in 2020,” Smialek explained.
By the way, the U.S. no longer defines a recession as two consecutive quarters of shrinking output, although many economists and the news media use that rule of thumb—myself included. Turns out a committee at the National Bureau of Economic Research, made up of eight leading, economists, makes the official call on recessions. Apparently, they look at a wide range of data, not just GDP growth, including early indicators, like industrial production and a monthly growth series produced by the firm Macroeconomic Advisers.
If you’re keeping score at home, output growth slowed to a 2.0 percent annual rate in Q2/19 from 3.1 percent earlier in the year. According to early data, that is still a respectable number and consumer spending remains pretty robust.
According to Smialek, if economic growth drops below its “sustainable level” — approximately 1.75 percent, based on demographic and productivity trends — it could, theoretically lead to higher unemployment and slower wage growth more broadly.
But many experts think it takes an outright recession to cause unemployment to rise across a range of industries in America. “Aside from one mild instance in the mid-1990s,” wrote Smialek, “the headline jobless rate has not jumped without an actual downturn in recent business cycles.” She said that’s partly because a recession becomes far more likely once businesses start cutting jobs. Employers are reluctant to lay off workers until business gets pretty bad, because hiring and training is expensive. Once they are forced to cut their head count and workers start to lose their paychecks, those consumers pull back sharply on spending — making it a surer bet that the economy will shrink in earnest.
Slow growth could actually cause higher unemployment without turning into a recession. While there’s no precedent for that in the United States, Australia has had several instances of rising unemployment in its 28-year-old economic expansion, without falling into a recession.
Bottom line: It may come down to perception rather than reality. As my friend Phil Palumbo of UBS Wealth Management likes to say: “If enough people and businesses think we’re headed for a recession, it becomes a self-fulfilling prophecy. If enough people think we’re okay, we’ll stay okay.”
There are opportunities in every market climate and every economic cycle. I am confident that you and your clients to be able to sniff them out. As Warren Buffet always says: “Stocks are the only thing people never buy when they’re on sale.” Same goes for capital improvements, hiring and R&D.
*** Take our latest InstaPoll: To what extent is the Inverted Yield Curve a reliable recession indicator?
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